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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
1. Whether shares of company given by director of company to employee for doing a good job well done is a taxable benefit.
2. What is the ACB of the shares to the employee?
3. What are the proceeds of disposition of the shares for the director?
Position TAKEN:
1. Question of fact, but likely yes.
2. Fair market value.
3. Fair market value.
Reasons FOR POSITION TAKEN:
1. Paragraph 6(1)(a) includes in employment income "the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, ..."
2. Either & 3. In non-cash transactions, proceeds of disposition and ACB generally equal to fair market value of property given up.
October 31, 2003
Bernie Gibson HEADQUARTERS
Business Enquiries T. Young
Client Services Directorate (613) 952-1506
Hamilton TSO
2003-003889
"Gift" of Shares
We are replying to your email of August 26, 2003, which was forwarded to us on September 15, concerning the taxation of shares received by an employee from the owner of all of the shares of a corporation for a job well done. We also acknowledge our conversation of October 21 (Gibson / Young).
In the scenario you presented, an individual (the "Shareholder") is the sole shareholder and a director of ACo. The Shareholder proposes to give a number of shares to an employee (the "Employee") as a "thank you for all your hard work". The Employee and the Shareholder deal with each other at arm's length. The proposed transaction is solely between the Shareholder and the Employee and there is no related agreement between the Employee and ACo.
You asked us the following questions:
1. Would the employee be in receipt of a taxable benefit?
2. What would be the adjusted cost base ("ACB") of the shares to the employee?
3. What would be the proceeds of disposition of the shares for the director?
1. Would the employee be in receipt of a taxable benefit?
Paragraph 6(1)(a) of the Act includes in employment income "the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, ..." In Nowegijick v. R., Justice Dickson of the Supreme Court of Canada stated,
The words "in respect of" are, in my opinion, words of the widest possible scope. They import such means as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters.
In general terms, where an employee receives shares from the sole shareholder and director of the employer as a "thank you for all your hard work", it is our view that they would likely be received in the capacity of an employee and would be taxable pursuant to paragraph 6(1)(a) of the Act.
We also considered whether section 7 of the Act might be applicable instead of paragraph 6(1)(a). However, in order for section 7 to be applicable, the transaction must be pursuant to an agreement between a "qualifying person" and an employee. Subsection 7(7) of the Act defines a "qualifying person" to mean "a corporation or a mutual fund trust". Since the shares would be received from the Shareholder and it is our understanding that the company is not otherwise involved in the transaction, section 7 would not apply to this scenario.
2. What would be the ACB of the shares to the employee?
The employee will receive or enjoy a taxable benefit equal to the fair market value ("FMV") when they are received.
3. What would be the proceeds of disposition of the shares for the director?
The director will have a disposition of the shares equal to the FMV of the shares on the date of disposition.
If you have any questions or if we may be of any assistance, do not hesitate to contact
Terry Young at (613) 952-1506.
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
c.c. Andrew Meredith
Business Program Section
Client Services Division
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