A discretionary trust for present and future employees of a company that had held shares of the company 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 submitted that this was a s. 7(2) trust and seemed to suggest that the shares allocated to Mr. X could be treated as satisfying the 24-month holding period for purposes of the deduction for gains from the disposition of qualified small business corporation shares.
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. …
Since this was such a discretionary plan, the employee benefit plan rules instead applied. In particular, CRA stated:
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 EBPs. In particular, the fair market value ("FMV") (determined at the time of the distribution) of the Shares distributed by the Trust to each employee beneficiary in favour of whom the trustees exercised their discretion would be required to be included in computing that employee's income by virtue of paragraph 6(1)(g). Thus, the full value of the Shares distributed to Mr. X would be included in computing his income as employment income, as to which the CGD would obviously be inapplicable. Furthermore, Mr. X would only be considered to own the Shares so received from the date of the distribution.
Finally, it should be noted that … McNeeley [under appeal] … considered a discretionary trust plan similar to the one in the situation described and concluded that the EBP rules applied.