XXXX
W.C. Harding (613)957-3499
October 20, 1987
Dear Sirs:
Re: XXXX Employee Benefit Plan
This is in reply to your letter of August 26, 1987 in request of our comments on the proper application of the Income Tax Act (the Act) to the above-noted plan.
It is our opinion that the plan as described in your letter and the attachments thereto is an arrangement as described in subsection 7(6) of the Act in that, under its provisions, shares of XXXX (the "parent") are acquired by a trustee for disposition, at no cost, to the employees of XXXX (the "company"), a wholly owned subsidiary of the Parent.
Subsection 7(6) of the Act provides that any rights of the employee under the plan in respect of the shares, any shares acquired thereunder by the employee or by a person in whom rights of the employee thereunder in respect of the shares have become vested, and any amounts paid or agreed to be paid to the trustee for any shares acquired thereunder by the employee or any such person shall be deemed to be, respectively, rights under, shares acquired under, and amounts paid to the company for shares acquired under, an agreement with the company whereby it has agreed to sell or issue shares to the employee. In consequence the remaining provisions of section 7 of the Act, except subsection 7(2) thereof, will have application as the circumstances warrant.
Under the provisions of subsection 7(3) of the Act, no benefit will be deemed to have been received by an employee by virtue of the agreement except as provided under section 7 of the Act. Accordingly, while the plan may be described as being either an employee benefit plan or a salary deferral arrangement, as each of those terms is defined in subsection 248(1) of the Act, no tax effects will thereby occur and, in consequence, those concerns raised in your letter will not arise.
In closing, we note that by virtue of Article 3.4 of the plan, the employer is considered to be the income beneficiary in respect of the plan's dividend income and, by virtue of article 4.4, is required to recontribute this income back to the trust. In our opinion the dividends would properly be income of the employee and any amounts thereof invested by the trustee in shares would be amounts paid by the employees to the company for shares acquired under the agreement.
These opinions are based on our best understanding of the law. They do not, however, form an advance income tax ruling and are therefore not binding upon the Department.
We trust the foregoing is satisfactory.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch