Dear Sirs:
Re: Subsection 7(3) of the Income Tax Act (the "Act")
This is in reply to your letter dated September 3, 1991 wherein you requested a technical interpretation as to whether subsection 7(3) of the Act would deny a deduction to a corporation in the following situation.
FACTS
1) Canco is a Canadian le in shares. As Canco's own share are not publicly traded, Canco and the executives agree to have the bonus paid in shares of USco.
4) When the bonus become due, Canco makes a cash payment to USco equal to the fair value of the shares. USco then issues the shares to the Canadian executives at Canco's direction.
YOUR VIEWS
Subsection 7(3) of the Act reads in part as follows:
"Where a corporation has agreed to sell or issue shares of the capital stock of the corporation or of a corporation with which it does not deal at arm's length to an employee... the income for the taxation year of the corporation... shall be deemed to be not less than its income for the year would have been if a benefit had not been conferred..."
It is your view that, as Canco purchases the shares from USco and then provides them to the employees in the form of compensation, the shares are accordingly neither "sold" nor "issued" by Canco, and therefore subsection 7(3) of the Act does not apply.
OUR COMMENTS
Where a benefit is deemed by subsection 7(1) of the Act to have been conferred on an employee by the sale or issue of shares, paragraph 7(3)(b) of the Act provides that no corporation is entitled to claim the amount of the benefit as a deduction in computing its income. As a result, it is our view that, in addition to disallowing a deduction in respect of the benefit where the relevant corporation has no laid out cost (i.e. shares were issued from treasury), paragraph 7(3)(b) of the Act disallows laid out costs incurred with respect to the benefit under any agreement to sell or issue shares to an employee of a corporation or to sell or issue shares of a non-arm's length corporation at less than fair market value or for no consideration. Therefore, the amount paid by Canco to USco would not be deductible pursuant to subsection 7(3) of the Act.
However, if the plan involves the purchase of shares of USco by Canco on the open market for a subsequent sale to the employees at market value, the Department may view such a plan, whether self-trusteed or administered through an independent trustee, as an "employee benefit plan" as described in subsection 248(1) of the Act.
We trust these comments will be of some assistance.
Yours truly,
P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch