Principal Issues: When does paragraph 53(1)(j) apply, with respect to shares of a CCPC
Position: Question of fact.
Reasons: We would need to review all of the relevant facts in the context of a ruling to determine if the arrangement is an agreement to sell or issue shares as contemplated by section 7 of the Act. As a result, general comments are provided based on the relevant sections of the Act.
XXXXXXXXXX 2005-012613 G. Allen August 18, 2005
Dear XXXXXXXXXX:
Re: Application of Paragraph 53(1)(j) of the Income Tax Act (the "Act")
This is in reply to your letter dated April 22, 2005, wherein you requested our views concerning the application of paragraph 53(1)(j) of the Act to a hypothetical situation involving a Canadian controlled private corporation ("CCPC") using a trust to administer an employee stock option plan for one employee. The trust will acquire treasury shares from the CCPC when options are exercised.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the CRA. All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.htm l.
Our Comments
Generally, in our view, the acquisition of treasury shares of a corporation by a trust, where the shares will be distributed to employees of the corporation at a later date, would be subject to the provisions of section 7 of the Act. In the context of an advance income tax ruling request, we would review all of the relevant facts to determine whether an agreement to sell or issue shares to an employee of the corporation exists for purposes of section 7 of the Act and whether the provisions of subsection 7(6) or 7(2) apply. This reply is based on the assumption that subsection 7(2) applies.
Where a CCPC agrees to sell or issue shares of the corporation to employees of the CCPC, subsection 7(1.1) of the Act modifies the timing of the income inclusion of the benefit received by the employee, for purposes of paragraph 7(1)(a), from "the taxation year in which the employee acquired the securities", to "the taxation year in which the employee disposed of or exchanged the securities". In a situation where a trustee holds shares absolutely, conditionally or contingently in trust for an employee, subsection 7(2) of the Act deems, inter alia, for purposes of section 7, the employee to have acquired the shares at the time that the trust began to hold the shares. As a result, in an arrangement where subsection 7(2) applies, an employee of the CCPC would be deemed to have acquired the shares for purposes of section 7 at the time that the trust acquires the CCPC shares and subsection 7(1.1) and paragraph 7(1)(a) of the Act will apply to deem the employee to have received a benefit in the taxation year in which the employee disposes of or exchanges the CCPC shares.
Paragraph 53(1)(j) of the Act provides for an addition to the adjusted cost base (ACB) of a share that is acquired under an employee stock option agreement. In accordance with paragraph 53(1)(j), for all shares acquired by an employee after February 27, 2000, the benefit that is deemed by section 7 to have been received by a taxpayer is added to the ACB of the shares at the time the share is acquired for purposes of section 7 of the Act. Accordingly, in our view, the addition of the section 7 benefit to the ACB of the CCPC shares would occur at the time that the trust acquires the shares for the benefit of the employee.
We trust the above comments will be of assistance.
Yours truly,
Roberta Albert, CA
Manager
Deferred Compensation Arrangements
and Retirement Plans Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch