News of Note
Various issues regarding trusts holding employer shares for employees are discussed
Email this ContentElizabeth 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).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in July of 2001. Their descriptors and links appear below.
These are additions to our set of 2,958 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 23 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Coopers Park – Tax Court of Canada finds that advice provided by KPMG was not protected by privilege despite KPMG’s label as the client’s agent in law firm dealings
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.
A Gold Fields Ontario subsidiary is proposing to acquire all the common shares of Osisko for cash
It is proposed that an indirect Ontario subsidiary of Gold Fields (the “Purchaser”) acquire the (common) shares of Osisko (a TSX-listed Ontario corporation whose principal asset is a 50% interest in the Windfall gold project in Quebec) for $1.9B in cash. The Purchaser acquired the other 50% interest in the Windfall Project in May 2023. Under the proposed Ontario Plan of Arrangement, which stipulates that the steps will occur at two-minute intervals starting at 12:01 a.m. Toronto time, a step has been inserted, between the cash-surrender of the RSUs and the cash-surrender of the DSUs, providing that all the directors shall be deemed to have resigned, so that for discrete intervals of time, Osisko will have no directors.
The Canadian tax disclosure contains detailed disclosure regarding the capital gains inclusion rate transitional rules.
Neal Armstrong. Summary of 6 September 2024 Circular of Osisko Mining Inc. (the “Company” or “Osisko”) respecting its acquisition by Gold Fields Windfall Holdings Inc. (the “Purchaser”) under Mergers & Acquisitions – Mergers – Shares for Cash.
CRA discusses EIFEL filing and election procedures absent forms, and waives the requirement for a s. 18.2(6) return
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).
Income Tax Severed Letters 25 September 2024
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CPA Canada identified deficiencies in the draft capital gains legislation which were addressed in the September 23, 2024 Notice of Ways and Means Motion
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).
CPA Canada indicates that there is insufficient scope to the s. 15(2.01) exceptions to s. 15(2)
Notwithstanding the expansion in s. 15(2.01) of the August 12, 2024 draft legislation of the exceptions to the application of s. 15(2) to debt, there continues to be uncertainty regarding the potential application of s. 15(2) to commonly encountered situations involving debts owing by a foreign corporation below a partnership given inter alia that the deeming rule in s. 93.1(1) for shares of a foreign corporation held through a partnership does not extend to s. 15(2).
An example would be two non-arm’s length corporations resident in Canada (CRICs) which are the sole members of a partnership (P1) wholly-owning a foreign corporation (Forco1) that in turn wholly-owns each of two foreign corporations (Forco2 and Forco3) that are the sole members of a second partnership (P2). There would be a concern that s. 15(2) could apply to a loan made by one of the CRICs to P2 given inter alia that the two Forco partners are not foreign affiliates.
Neal Armstrong. Summary of CPA Canada, “Submission regarding Technical Amendments Legislation in Budget 2024 included in the August 2024 Draft Legislation,” 11 September 2024 CPA Canada submission under s. 15(2.01).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in July and June of 2001. Their descriptors and links appear below.
These are additions to our set of 2,952 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 23 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
The Joint Committee explains why the sledgehammer approach of Finance to encouraging compliance with requirements for information is unconstitutional
S. 231.9(1) (included in August 2024 draft legislation) allows the Minister to send or serve a person with a notice of non-compliance (NNC) regarding a s. 231.1. 231.2 or 231.6 requirement (a “Requirement”). The recipient may, within 90 days of receipt, request the Minister (pursuant to s. 231.9(4)) to review the NNC. Pursuant to s. 231.9(6) the Minister must vacate the NNC if she determines that it was “unreasonable” to issue the NNC or that the person had, prior to the issuance of the NNC, done everything reasonably necessary to comply with each relevant Requirement. If the NNC is instead confirmed, the person may apply (pursuant to s. 231.9(8)) for judicial review of such decision, and the Federal Court may (pursuant to s. 231.9(9)(b)) vary or vacate the NNC if it determines that the Minister’s decision “was not reasonable.”
Concerns expressed by the Joint Committee regarding s. 231.9 include:
- Where the taxpayer refuses to provide information on the basis of solicitor-client privilege and the Minister nonetheless issues a NNC, this could pressure the taxpayer into waiving privilege rather than undertaking the onerous NNC dispute process – suggesting that since a compelled waiver is not valid, the production of documents resulting from the NNC’s issuance would likely constitute an unreasonable search or seizure contrary to s. 8 of the Charter.
- Even if s. 231.9(6) or (9) authorizes the Minister or the Federal Court on an appeal under s. 231.9(4) or (8) to evaluate the legality of the Requirement or whether the taxpayer was required to comply with it, evaluation of the legality of the Requirement or of the taxpayer’s s. 7 or 8 Charter right to refuse to comply with it are questions of law “’that are of fundamental importance and broad applicability’, with significant legal consequences for the justice system as a whole or for other institutions of government”, subject to review on a standard of correctness (Vavilov, at paras. 59-62).
- This requirement for a review of correctness clashes with s. 231.9(9), which contemplates the Federal Court reviewing whether any CRA decision to reject a privilege claim in relation to a document covered by a NNC was reasonable, a review which generally would be limited to considering that decision in light of the material before the CRA decision maker – which, crucially, would not include the document for which privilege was claimed.
- In contrast, the Federal Court’s review under s. 231.7 of any compliance order sought by the Minister of a document for which the taxpayer claimed privilege would be applied under a correctness standard (likely including a review of the document) – so that there could be a situation (representing an affront to the rule of law) in which taxpayer was penalized under s. 231.9 for what was subsequently established not to be a failure.
- Regarding the requirement in s. 231.9(6) for the Minister to vacate a NNC where the taxpayer had “done everything reasonably necessary to comply with each [relevant] requirement,” a taxpayer taking reasonable steps to comply with a requirement should not be subjected to the s. 231.9(12) penalty merely because the Minister, with the benefit of hindsight, points to alternative actions which the taxpayer might have taken.
- For example, if CRA issues a Requirement (with a 30-day deadline) asking for a copy of a share purchase agreement concluded 30 years earlier (relevant to the ACB of shares) and the taxpayer, believing that such agreement would be at an off-site storage site, searches such records and does not locate the agreement and so reports to CRA, who then issues a NNC, it might be inappropriate in the circumstances for the Minister to then determine that the taxpayer did not do everything reasonably necessary because it did not request a copy of the agreement from the law firm which assisted on the original purchase.
Draft s. 231.7(6) provides for the automatic imposition of a penalty against a person where the Federal Court has issued a compliance order under s. 231.7(1), equal to 10% of the aggregate amount of tax payable by the taxpayer for each year in respect of which the compliance order was issued (provided that such tax is at least $50,000.) Concerns expressed include:
- A penalty that is “out of proportion to the amount required to achieve regulatory purposes” may constitute a true penal consequence engaging the criminal procedural protections of s.11 of the Charter (Guindon, at para. 77).
- To illustrate the disproportionate nature of the automatic penalty under s. 231.7(6), consider a corporation which provided 95 out of 100 documents requested regarding an audit of three taxation years, and claimed solicitor-client privilege for the other 5 documents and, in connection with CRA seeking a compliance order, the Federal Court determines that there was insufficient evidence to establish that two of the documents were privileged: even though the corporation was substantially compliant, it is subjected to the penalty of 10% of its tax for the three years.
- To provide another example, where CRA obtains a compliance order regarding the refusal of an insurance company, with annual taxes of $100M to provide information relating to a potential dispute (involving, say, $1M in taxes) between a client of the insurance company and CRA, on the grounds that CRA had failed to obtain a judicial authorization pursuant to s. 231.2(2), the resulting penalty of $10M is grossly disproportionate to the conduct of the insurance company.
- Where the threat of penalties compels production of documents which CRA is not entitled to obtain, the demand therefor constitutes an unreasonable search and seizure contrary to section 8 of the Charter.
Neal Armstrong. Summaries of Joint Committee, "Submission regarding proposed audit powers in Budget 2024 included in the August 2024 Draft Legislation", 11 September 2024 Joint Committee Submission under s. 231.41, s. 231.9(6), s. 231.7(6), and s. 231.8(1).