A discretionary trust for present and future employees of ABC Inc. that had held shares of ABC Inc. since January 1, 2021, will add Mr. X as a discretionary beneficiary when he is hired on January 1, 2022 (without any change to its shareholdings). The questioner suggested that where there was a s. 7(2) trust such as this (which was deemed by s. 110.6(16) to be a personal trust for qualified small business corporation share (QSBC) purposes and which could allocate taxable capital gains pursuant to ss. 104(21) and (21.2)), s. 7(2) deemed shares to be acquired by the employee when the trust commenced to hold shares for the employee.to hold shares for the employee.
How then should the 24-month holding period calculation be applied for QSBC purposes in this situation?
After referring to Transalta for the proposition “that a discretionary arrangement was not an agreement to issue or sell shares for the purposes of section 7 since no legal rights or obligations were created,” CRA stated:
[A] trust plan providing that the allocation and distribution of the corporation's shares to its employees, who are beneficiaries of the trust, will be made on an entirely discretionary basis would not be governed by s. 7. …
[S]ubsection 7(2) does not serve to deem the existence of an agreement to issue or sell shares for the purposes of section 7 where such an agreement does not, in fact, exist. …
[W]hen he becomes a discretionary beneficiary of the Trust on January 1, 2022, Mr. X will not be entitled to a specified number of Shares under an enforceable obligation. Instead, the trustees will only allocate Shares to Mr. X at the time of (or shortly before) making a distribution and only if they decide to exercise their discretion in his favour, which may never happen, or may occur several years after the Trust has acquired the Shares. Such a discretionary plan would not involve a legally enforceable obligation and would therefore not be governed by section 7.
Since section 7 would be inapplicable, the tax treatment resulting from the trust plan put in place would be governed by the rules applicable to [employee benefit plans].