News of Note

Elizabeth Boyd and Jeremy Herbert have provided an extensive discussion of issues regarding the holding of shares for employees by trusts, so that only a few facets can be mentioned.

Regarding employees profit sharing plans:

• EPSPs seem to be used quite frequently to facilitate employee share purchase plans to which both the employees (by way of payroll deduction) and employers contribute on the open market.
• When so used, advantages of the EPSP over an employee benefit plan (EBP) trust include that the increase in the shares’ value from their acquisition can be received by the employee as a capital gain (in contrast to employment income under an EBP) and dividends and capital gains generated by the EPSP can retain that character when allocated to an employee – and the employer’s deduction of contributions to an EPSP is more immediate and straightforward (i.e., no need for the trustee to determine the employer’s deduction nor is it offset by income earned in the trust).
• The taxation of participants in the year in which contributions are made to an EPSP (in contrast to an EBP trust whose participants are not taxable regarding contributions to or earnings of the trust until they receive a distribution) means that EPSPs will usually be most useful in connection with employee share plans under which the contributions are relatively small.
• Most EPSP employee share purchase plans seem to be “out of profit” EPSPs under which the employer can base contributions on a percentage of employee earnings or a dollar amount.

Conclusions regarding an arrangement under which the resident corporate employer settles shares of its capital on a trust for the benefit of specific employees (free of charge to them), with the employees’ entitlements vesting after a specified period of employment, include:

• Since such trust is not a fully discretionary trust and allocations to the trust are for specific employees, the requirement in s. 7(1) for there to be an agreement to issue securities should be met, so that the s. 7 rules as modified by s. 7(2) can apply.
• In the non-CCPC context, such a trust does not provide material advantages over a traditional employee stock option structure.
• In the CCPC context this type of arrangement can be beneficial in that the clock starts running once the trust acquires the shares regarding both the s. 110(1)(d.1) 50% deduction and the hold period required to access the employee’s lifetime capital gains deduction for qualified small business corporation shares, even though vesting does not occur until three years later – and, conversely, If the vesting conditions are not met and the shares are forfeited back to the corporation, the s. 8(12) deduction to offset the s. 7 inclusion is available in the same year such employment benefit is recognized.
• However, uncertainty of tax treatment of distributions of shares or proceeds realized by the trust on a sale of shares (regarding whether and to what extent in this regard the s. 7 rules should prevail over the EBP regime) materially impacts the utility of this structure.

Various considerations for structuring a market maker trust (i.e., a trust established by the private corporate employer, with itself as beneficiary, to effect purchases and sales of shares of employees other than specified employees so as to give them capital gains rather than deemed dividend treatment) are discussed.

Neal Armstrong. Summaries of Elizabeth Boyd and Jeremy J. Herbert, "Trusts Holding Shares For Employees", draft 2023 CTF Annual Conference paper under s. 248(1) – employee benefit plan, s. 144(4), s. 144(7.1), s. 144(9). s. 144(3), s. 7(6), s. 7(2), s. 8(12) and s. 15(2.5).

The engagement letter between the taxpayer and other clients (the "Concord Parties"), a law firm that was to provide tax advice to the clients (Moscowitz Law), an accounting firm (KPMG Accounting) and a second law firm (Farris Law) indicated that “KPMG Accounting’s role was to act as agent on behalf of the Concord Parties to retain Moskowitz Law and to provide Moskowitz Law with factual and other information.”

Hill J found that most of the documents before her for which the taxpayer claimed solicitor-client privilege were not protected from production to the Crown. In particular, in various instances:

KPMG Accounting provided independent legal advice beyond the scope of its role as agent under the Engagement Letter. … [P]roviding advice to a lawyer as part of an overall retainer, even if the lawyer then incorporates it into their own legal advice, does not make a communication privileged. Furthermore, KPMG Accounting provided that legal advice to Farris Law, a different law firm outside of the specific solicitor-client relationship established in the Engagement Letter.

Neal Armstrong. Summary of Coopers Park Real Estate Development Corporation v. The King, 2024 TCC 122 under General Concepts – Solicitor-client privilege.

CRA has published a Webpage on the EIFEL (excess interest) rules. In addition to providing a basic overview of the rules and briefly explaining why it might be advantageous to make various of the available elections, CRA makes the following administrative announcements:

• Although the EIFEL reporting is required to be made largely on Sched. 130, this form is not yet available. However, CRA still requires the same information to be provided to it with the return, and explains the procedures it would like to be followed in this regard pending its release of the Schedule.
• The various election forms are also not available, so that, until then, a separate election should be sent in for each election.
• Although s. 18.2(6) requires the transferee of cumulative unused excess capacity pursuant to a joint election with the transferor to file an information return, CRA states that it “is not requiring the filing of this information return at this time.”

Neal Armstrong. Summaries of CRA Webpage, “Excessive interest and financing expenses limitation rules,” 24 September 2024 under s. 18.2(18), s. 18.2(4), s. 18.2(16), s. 18.2(1) – specified pre-regime loss, and s. 95(2)(f.11)(ii)(E).

CPA Canada identified issues in the August 12, 2024 draft capital gains inclusion rate legislation, which Finance took into account in the Notice of Ways and Means Motion that was released on September 23, 2024 (“WMM”). Some of these points were:

• The formulae in ss. 13(7)(b), (d) and (e) for computing the step-up in the capital cost of depreciable property where there has been a full or partial change of use or a non-arm’s length transfer produced illogical results. (These formulae were corrected in the WMM.)
• Variable E of the formula in s. 38.01 (allowing an election for the $250,000 threshold to be used for capital gains of an individual from dispositions or deemed dispositions described in any of s. 13(7)(b), (d) or (e)) seemed to allow a taxpayer which had acquired capital property and made a joint election with the transferor under 13(7.7) to deduct up to 50% of the amount covered by the election even though such transferee realized no gain on the transfer. Variable E referred to the amount covered under the election but seemed to apply both to the transferor and transferee. (This is corrected in the WMM by adding a reference in E to the elected amount being an amount relating to a capital gain of the taxpayer under s. 13(7)(b), (d) or (e)).
• Regarding, for example, Aco (with a June 30, 2024 taxation year-end) which was a member of a partnership (with a March 31, 2024 taxation year end) which realized a capital gain on March 1, 2024, given the absence of a rule to deem partners of a partnership with a taxation year ending before June 25, 2024 to have realized any allocated capital gains from the partnership in Period 1, Aco would have a capital gains inclusion rate of 2/3. (The WMM addressed this by adding a further transitional rule: s. 96(1.73).)

Neal Armstrong. Summaries of CPA Canada, “Summary of Issues Identified: Capital Gain Inclusion Rate Draft Legislation,” 3 September 2024 CPA Canada submission under s. 13(7)(e), s. 38.01(b) – E, and s. 96(1.72).