10 June 1986 Income Tax Severed Letter

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.

Peter K. Noack (613) 995-0051 5-1315

Dear Sirs:

XXXX

This is in reply to your letter of March 21 on the above subject. You ask that we confirm a method of calculating the taxable benefit and the capital loss arising from the forgiveness of loans extended by the employer to employees to enable them to purchase shares in the employer company under the share purchase plan for fair market value. Your calculation is based on the assumption that a benefit will be received by the employees at the time a loan is forgiven and that the benefit will amount to the present value of the loan balance outstanding at the time the loan is forgiven.

Clause 5.5 of the plan grants the employee in the circumstances described in subclauses (a) to (c) the right to require the company to purchase the shares for a consideration equal to the unpaid balance of the employee's loan and provides that in that case the employee's loan shall be deemed to be extinguished.

In our opinion, any benefit to employees participating in the plan arises at the time the employee buys the shares after he has signed and delivered to the company the required documentation for participation in the plan. The amount of the benefit would be the value of the employee's right to sell the share to the company granted under clause 5.5 of the plan. The proceeds of disposition of the shares sold by exercising this option would be the face value of the unpaid balance of the employee's loan deemed to be extinguished by virtue of subclause 5.5(e) of the plan. Subsection 84(3) of the Income Tax Act would apply at the time of acquisition of the shares to deem the company to have paid a dividend equal to the amount, if any, by which the face value of the loan balance forgiven exceeds the paid-up capital of the shares.

This opinion is our best interpretation of the law as it applies generally. It may, however, not always be appropriate in the circumstances of a particular case, and, as stated in paragraph 24 of Information Circular 70-6R, it is not binding on the Department. As we informed you we have referred your case to the District Office for appropriate action.

Yours truly,

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch