7 July 1999 External T.I. 9908065 - BARE TRUST, EMPLOYEE SHARE SAVINGS PLAN

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Would an employee share purchase plan trust be a bare trust or agency relationship? How would the new trust legislation (December 1998), if enacted impact upon this analysis.

Position: Question of fact. No change.

Reasons: The draft legislation on this issue essentially attempts to codify existing practices, thus an arrangement that is a bare trust should still constitute a bare trust after the legislation is enacted.

XXXXXXXXXX 990806
M. P. Sarazin
Attention: XXXXXXXXXX

July 7, 1999

Dear Sirs:

Re: Employee Share Savings Plans

This is in reply to your letter dated March 17, 1999, wherein you requested general information regarding the application of the proposed new definition of disposition in subsection 248(1) of the Income Tax Act (the “Act”) to employee share savings plans.

You have described a situation where an arrangement is structured for employees to acquire shares of the employer on a “tax-paid” basis such that the arrangement is none of a section 7 stock option plan, an employee benefit plan, an employee profit sharing plan, a deferred profit sharing plan or a registered retirement savings plan. You have stated that such plans are generally administered by a trust company with the trust company acting either as custodian or as trustee. All such trusts are resident in Canada. You are seeking information as to whether or not, when structured as a trust, the trust could be considered a bare trust such that there would be no disposition of the shares when transferred to the employees from the trust. You also are seeking information as to what impact, if any, the draft trust legislation, released in December 1998, would have on this analysis, if that legislation were enacted as proposed.

Comments

The determination of whether a trust is a bare trust for purposes of the Act is a question of fact that could only be determined after a review of all of the facts related to the particular trust arrangement. As stated in Income Tax Technical News No. 7, we generally view a trust under common law to be a bare trust when:

• the trustee has no significant powers or responsibilities, and can take no action without instructions from the settlor;
• the trustee’s only function is to hold legal title to the property; and
• the settlor is the sole beneficiary and can cause the property to revert to him or her at any time.

In our view, a trust established by an employer for the benefit of several employees would not meet the conditions described above and, as such, would not qualify as a bare trust.

We also note that the December 1998 draft trust legislation related to this matter is intended to codify existing practices, and thus we would not expect any change in the manner in which the plans you have described above are taxed should the draft legislation be enacted as proposed. That is, if the arrangement is currently a trust, it would continue to be a trust and if the arrangement is currently a bare trust, it would continue to receive the same tax treatment as a bare trust.

We trust these comments will be of assistance.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch