22 October 1997 External T.I. 9724915 - SDA, PHANTOM SHARES, SHARES HELD IN A TRUST

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:

Is an arrangement in which shares are issued to a trust at a discount an SDA where employees may acquire units in the trust as a consequence of their employment? Could 7(2) apply to such a trust?

Position:

No firm positions were given since the letter deals with a proposed transaction. However, we state that it would seem reasonable to consider that the arrangement might be an SDA or that section 7(2) might apply.

Reasons:

A unit of a trust may be viewed as the equivalent of a phantom share. Accordingly, our position on phantom shares could possibly apply in some cases. The trust also gives the employees all rights of ownership of the shares but for the fact they may not take physical ownership of the shares. Therefore it also seems reasonable that in some instances it would be appropriate to apply subsection 7(2).

	                              	972491
XXXXXXXXXX                           	W.C. Harding

Attention: XXXXXXXXXX

October 22, 1997

Dear Sirs:

Re: Salary Deferral Arrangements

This is in reply to your letter of September 19, 1997, in which you asked if we would consider a plan described in your letter to be a salary deferral arrangement.

Written confirmation of the tax implications inherent in particular proposed transactions are given by this Directorate only where the transactions are outlined in an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. Questions concerning actual fact situations should be directed to your local tax services office. Accordingly, since your situation deals with a factual situation, we can not provide a specific answer to your query at this time. However, we can provide the following general comments which are not binding on the Department but may be of some assistance.

Question 26 of the 1988 Canadian Tax Foundation Round Table dealt with phantom stock plans. In our reply to that question we stated that where, on a specific date, the value of phantom shares on that date will be paid to an employee, the plan will be considered to be a salary deferral arrangement notwithstanding that the value on the payment may be less than the value at the time such shares were granted. In this respect, we noted that where the amount paid to an employee is based on the full value of the specified share, the phantom shares were generally granted in respect of the employee's past services.

We also stated that where, on a specified date, an employee is entitled to receive only the increase in the value of the underlying phantom shares, (a type of plan referred to as a stock appreciation rights plan) it will generally not be considered a salary deferral arrangement. In this respect we noted that where the amount paid to the employee is based only on the increase in the value of the underlying shares, the phantom shares were generally granted in respect of the employees's future services.

In our opinion, a unit of a unit trust that holds shares of an employer or a related corporation for the benefit of an employee might reasonably be considered to be equivalent to a phantom share. Accordingly, it would seem to us that a similar position to the position noted above could be applicable. Therefore, where shares are issued to a trust at a discount but the employee may receive the full value of the shares held by the trust, we might consider it appropriate in some circumstances, to treat the arrangement as a salary deferral arrangement.

In our opinion, we also believe the provisions of subsection 7(2) of the Income Tax Act could apply to such a trust in some situations, even though the terms of the trust do not permit the settlement of an employee's rights under the trust through a distribution of the shares. In this respect, it appears to us that an employee would enjoy all of the rights of ownership of the shares as contemplated by the provisions of that subsection.

We trust these comments will be of assistance.

Yours truly,

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