CRA first stated that Placer Dome, Chrysler and McAnulty “stand for the proposition that an arrangement to issue or sell shares need not be a detailed written contract to fall within the scope of section 7 or paragraph 110(1)(d), but nonetheless must create legally binding rights and enforceable obligations.”
CRA considered a trust established by a CCPC to acquire and hold shares of the corporation for employees, with allocations among the employees and distributions entirely at the discretion of the trustees. Several years later and after appreciation in the value of the shares, the trustees decide to distribute the shares to employee beneficiaries (including subsequent hires) in accordance with an allocation determined by the trustees at that time. In finding that the s. 110(1)(d) deduction was not available, CRA stated:
A trust arrangement that provides for allocations and distributions of employer shares on a fully discretionary basis would not be governed by section 7. Such a discretionary arrangement lacks the requisite legally binding agreement as neither the corporation nor the trustees have any obligation to transfer shares to any specific beneficiary and no particular beneficiary has any enforceable right to shares until the discretion is exercised. …
[S]ubsection 7(2) cannot apply any earlier than when a specific number of shares have been allocated to an identifiable employee pursuant to a legally binding agreement to issue or sell shares.
Since section 7 would not be applicable, the income tax treatment would be determined under the EBP rules.