Section 32.1

Subsection 32.1(1) - Employee benefit plan deductions

Administrative Policy

1 August 2019 Internal T.I. 2018-0781951I7 - Employee benefit plan and recharge agreement

payments made by Canco to parent for the value of parent shares distributed by parent-funded EBP to Canco employees were not deductible under s. 32.1

Parentco (apparently, a non-resident public company) funds and administers a performance share plan (“PSP”) for employees of group companies, including Canco (a subsidiary). A PSP award is a conditional award of Parentco shares to be delivered upon vesting, which occurs based on performance conditions which are measured over the subsequent 3-year period (with a view to satisfying the exception in para. (k) of s. 248(1) - “salary deferral arrangement.”) A vested award may be settled in either shares or the cash equivalent, at the discretion of Canco or Parentco. Parentco periodically contributes cash to a custodian (under an arrangement found by the Directorate to be an employee benefit plan). Such funds are used to purchase shares on the open market, with the shares used to settle awards under the PSP as well as other equity-based incentive plans.

Canco makes reimbursement payments to Parentco pursuant to a recharge agreement for the value of shares distributed to Canco’s employees in satisfaction of vested PSP awards.

In rejecting the deductibility of such payments under s. 32.1 (and before finding that they likely were deductible under s. 9), the Directorate stated:

To be deductible under section 32.1, Canco’s reimbursement payment to Parentco would have to be considered to be a contribution to the EBP by Canco. Given the potentially significant differences in both the amount and timing of the reimbursement payment as compared to the actual contributions made by Parentco … the reimbursement payments are not equivalent to Parentco’s contributions to the EBP, and thus cannot be considered to be a proxy for those contributions.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(b) no s. 7(3)(b) prohibition where at employer’s option to settle PSPs in cash or in shares 230
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(a) s. 7 rules do not apply to shares purchased through a trust 166
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Employee Benefit Plan custodial PSP arrangement was an EBP 182
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose recharge payments made for employees participating in parent-administered PSP not deductible to extent they were employed by affiliates during vesting period 233
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) request for deduction not to be allowed if based on case decision rather than error 259

20 January 1994 T.I. 940075 HAA4735-1 (C.T.O. "EBPs, EPSPs, DPSPs and Section 7")

If employer contributions can only be used to purchase, on the open market, employer's shares or shares of a corporation with which it does not deal at arm's length, s. 7 will not apply and a deduction under s. 32.1(1) will be allowed.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 147 - Subsection 147(8) 31

ATR-17 9 February 1987 (Cancelled)

deduction for employer portion of previous contributions to employee stock purchase plan

EmployerCo (a Canadian pubic corporation) will make a contribution at the end of each year to an Account of each Employee and “Approved Holder” (such as an Employee RRSP) equal to $1.00 for every $4.00 in the account (including interest) as a result of a previous employee stock savings plan. At that time, under the terms of this New Plan, the total funds contained in the Employee and Approved Holder Accounts will be used in the following manner:

  • To the extent that the funds represent contributions of the employee or approved holder they will be used to purchase common shares from EmployerCo treasury, which shares are then distributed to the Employee or Approved Holder Account before the end of the year.
  • To the extent that the funds represent monies contributed by EmployerCo including interest earned on the accounts, they will be contributed to a trust (whose trustees are EmployerCo officers) for the benefit of the employee or approved holder. The trust will then distribute an identical amount to the employee or approved holder, which distribution will be in the form of common shares of EmployerCo which were purchased by the trustees on the open market. These shares are distributed to the Employee or Approved Holder Account before the end of the year.
  • The price per share for the purpose of determining both the number of shares which are to be issued from EmployerCo's treasury and the number of shares which are to be distributed by the trust will be the average of the closing price of EmployerCo's common shares on a Canadian stock exchange on the five days on which at least a board lot of EmployerCo's common shares was traded immediately preceding the end of the year (but excluding the days from December 21 to December 31).

An employee may cancel participation in the New Plan at any time and receive a refund of contributions with interest

Rulings that the Trust will constitute an "employee benefit plan," that EmployerCo's contribution, which includes interest on employee's contributions, under the New Plan will be deductible by EmployerCo, in the year that the shares purchased by the trustees are distributed to the employees, pursuant to s, 32.1, and that an amount equal to the fair market value of the common shares of EmployerCo distributed by the trustees to the Employee's Account under the term of the New Plan will be taxable as income to the employee under s. 6(1)(g) of the Act in the year the shares are distributed by the trustees (with such FMV calculated as described above).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares public shares valued at 5-day average 137