Principal Issues: [TaxInterpretations translation] Does an issuance of shares by a particular corporation to the TFSA of a key employee give rise to an advantage within the meaning of subsection 207.01(1)?
Position: Such an issue of shares could give rise to an advantage depending on the circumstances applicable to a particular situation.
Reasons: Question of fact.
May 27, 2009
Montreal Tax Services Office Headquarters Technical Interpretation Service Income Tax Rulings Directorate Mélanie Beaulieu (613) 957-9226 Attention: Marie-France Pleau 2009-032031
Part XI.01 tax
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
This is further to your email of May 1, 2009, in which you asked our opinion on the application of Part XI.01 of the Act to a particular situation involving an issuance of shares by a particular corporation ("Opco") to the tax-free savings account ("TFSA") of a key employee of Opco (the "Key Employee"). In particular, you described a situation in which the sole shareholder of Opco ("Mr. X") proceeded with a freeze of the shares of Opco. As part of this freeze, 5% of the new common shares of Opco were issued to the Key Employee (unrelated to Mr. X), who used his TFSA to subscribe for the shares. Mr. X, for his part, held 95% of the new Opco common shares, in addition to all of the freeze shares. We have assumed for the purposes hereof that the common shares subscribed for by the Key Employee's TFSA were otherwise a qualified investment and are not a prohibited investment within the meaning of those expressions as defined in subsection 207.01(1).
You noted that the Key Employee's compensation would not be decreased as a result of this share issue, and that it would continue to be increased annually based on the Consumer Price Index.
Our Comments
Subsection 207.05(1) essentially provides that a tax is payable for a calendar year in connection with a TFSA if, in the year, an advantage in relation to the TFSA is extended to, inter alia, the holder of the TFSA. Under paragraph 207.05(2)(a), the tax payable is equal to the fair market value ("FMV") of the advantage, where the advantage is a benefit. Under subsection 207.05(3), the holder of the TFSA is liable to pay the tax except that, if the advantage is extended by the issuer of the TFSA, the issuer is liable to pay the tax.
The concept of "advantage" is defined in subsection 207.01(1)1. It includes any increase in the total FMV of the property held in connection with the TFSA that can reasonably be considered, having regard to all the circumstances, to be attributable, directly or indirectly, to (i) a transaction or event (or a series of transactions or events) that would not have occurred in an open market in which parties deal with each other at arm’s length and act prudently, knowledgeably and willingly, and had as one of its main purposes to enable the holder to benefit from the exemption from tax under Part I of any amount in respect of the TFSA; or (ii) a payment received in lieu of, inter alia, a payment for services provided by the holder.
Whether an issuance of shares in particular circumstances may give rise to a benefit within the meaning of paragraph (b) of the definition of "advantage" in subsection 207.01(1) is a question of fact that can only be resolved following a detailed examination of all relevant facts and circumstances.
In the situation you have described to us, it appears that the shares of Opco subscribed for by the TFSA of the Key Employee were issued by Opco because of the employment relationship between Opco and the Key Employee. Thus, it appears to us that the issuance of those shares would not have occurred in an open market where parties deal with each other at arm's length, and that the main purpose of the issuance was to allow the Key Employee, the holder of the TFSA, to benefit from the exemption from tax under Part I with respect to an amount relating to the TFSA. In such a case, we believe that it would be reasonable to consider as a benefit any increase in the total FMV of the TFSA's property that could be attributable, directly or indirectly, to the issuance of shares of Opco to the Key Employee's TFSA.
Consequently, we are of the view that the situation described above could give rise to an advantage within the meaning of subsection 207.01(1). However, we would need to know all of the relevant facts in order to reach a definitive conclusion.
We hope that these comments are of assistance.
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
ENDNOTES
1 Paragraph (b) of the definition of "advantage" in subsection 207.01(1) reads as follows:
(b) a benefit that is an increase in the total fair market value of the property held in connection with the TFSA if it is reasonable to consider, having regard to all the circumstances, that the increase is attributable, directly or indirectly, to
(i) a transaction or event or a series of transactions or events that
(A) would not have occurred in an open market in which parties deal with each other at arm’s length and act prudently, knowledgeably and willingly, and
(B) had as one of its main purposes to enable a person or a partnership to benefit from the exemption from tax under Part I of any amount in respect of the TFSA, or
(ii) a payment received as, on account or in lieu of, or in satisfaction of, a payment
(A) for services provided by a person who is, or who does not deal at arm’s length with, the holder of the TFSA, or
(B) of interest, of a dividend, of rent, of a royalty or of any other return on investment, or of proceeds of disposition, in respect of property (other than property held in connection with the TFSA) held by a person who is, or who does not deal at arm’s length with, the holder of the TFSA; …