| 19(1) | File No. 5-8373 |
| A. Humenuk | |
| (613) 957-2135 |
October 5, 1989
Dear Sirs:
Re: Employee's Share Purchase Plan
We are responding to your letter of July 12, 1989, concerning the repurchase by an employer of shares acquired by its employees through an employees' share purchase plan.
In the situation you describe, selected employees were allowed to purchase shares of the employer corporation and were able to finance the acquisition of such shares by way of interest free loans from the employer. A participating employee had all incidental rights of ownership with respect to the shares. While the terms and conditions of each individual loan were subject to variation, each loan contained the following elements:
(a) The proceeds of the loan had to be used to acquire shares of the employer corporation;
(b) The term of the loan could not exceed five years; and
(c) The loan was not repayable in advance.
As we understand the facts described, in the event that the employee ceased to be employed before the loan was repaid due to resignation or termination of employment for cause, the employee was required to repay the loan within three months of the termination by means of a transfer of shares back to the employer. If the fair market blue of the share at that time was in excess of the balance of the loan outstanding, the employee was required to transfer all the shares to the employer and forfeit any growth in equity on those shares. If the fair market value of the shares at that time was less than the balance of the loan outstanding, the employee was entitled to and required to sell the appropriate number of shares to the employer at the original issue price in satisfaction of the debt.
You have asked for confirmation that the employee will not be considered to have received a taxable benefit under subsection 15(1), 15(1.2), 6(15) or paragraph 6(1)(a) of the Income Tax Act (the "Act") In respect of the repurchase of shares and settlement of debt, particularly where the fair market value of the shares has fallen. As such a determination would depend on the relevant facts of a particular case, we are unable to provide you with a definitive response without a review of all the relevant documentation. Questions concerning completed transactions of actual taxpayers should be referred to the local District Taxation Office along with authorization from the taxpayers involved. However, we would like to offer the following general comments.
Where an individual Is both a shareholder and an employee, it is a question of fact as to whether any particular benefit is received by virtue of his employment or by virtue of his shareholdings. Where it is established that the benefit or transaction is as a result of employment, it is our view that neither subsection 15(1) nor 15(1.2) of the Act would be applicable.
However, it is our view that subsection 6(15) of the Act would apply where the employee's debt is extinguished for an amount less than the amount of the debt outstanding. As we understand the situation you describe, the employee's debt is extinguished by the transfer of shares to the corporation. If the fair market value of the shares so transferred is less than the amount of the debt outstanding, subsection 6(15) of the Act will deem the amount of the difference to be a taxable benefit under paragraph 6(1)(a) of the Act.
Alternatively, if the repurchase of shares is considered independently of the settlement of the debt, it is our view that the employee would still receive a taxable benefit under paragraph 6(1)(a) of the Act if the employer repurchases the shares at an amount greater than the fair market value of the shares at that time.
We trust our comments will be of assistance to you.
Yours truly,
for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch