Black – Tax Court of Canada finds that s. 7(2) did not apply to a trust holding employer shares for employees where none of the shares were specifically allocated to specific employees

A year before a sale of 61% of a private Canadian video gaming company for Cdn.$73 million, an estate freeze was implemented by its dominant individual shareholder, and a 15% common shareholding was issued for nominal consideration to a trust for the benefit of present and future employees. Employees were issued units in the trust (which, in aggregate, came to equal the number of common shares held by it) from time to time as determined by the compensation committee, and with any distributions of trust income to be made pro rata to their respective unitholdings. On the sale of 61% of the trust’s shares, it distributed the sales proceeds to its unitholders pro rata to their unitholdings.

Spiro J found that Chrysler No. 1 had found that, in the context of a mooted s. 7(2) trust:

the subsection 7(1) requirement for an agreement to “issue” a particular number of shares to a particular employee included an agreement to “allocate” a particular number of shares to a particular employee where a trust held the shares for the employee.

He further found:

[A]n agreement to issue shares within the meaning of subsection 7(1) does not arise when the corporation commits itself to allocating a certain number of shares in the aggregate to all eligible employees by way of a trust. That is exactly what happened here. By committing itself to issuing 1,380,000 shares to a trust for the benefit of all eligible employees, the Company failed to meet the requirements of subsections 7(1) and 7(2) … .

As ss. 7(1) and (2) did not apply, and the trust was acknowledged to be an employee benefit plan, the distributions to the unitholders were fully taxable to them under s. 6(1)(g) and did not benefit from more favourable treatment under s. 104(21) or 110.6(2.1).

Neal Armstrong. Summary of Black v. The King, 2024 TCC 96 under s. 7(2).