25 January 2002 External T.I. 2001-0112985 - EBP

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Will the acquisition of treasury shares by an employee benefit plan result in the application section 7 of the Act?

Position: Question of fact.

Reasons:

We have concluded that section 7 of the Act will override the general EBP provisions. To conclude in a specific case, we would have to review all of the facts.

XXXXXXXXXX 2001-011298
M. P. Sarazin, CA
January 25, 2002

Dear XXXXXXXXXX:

Re: Employee Benefit Plans and Section 7 of the Income Tax Act (the "Act")

This is in reply to your letter of January 2, 2002, amending XXXXXXXXXX facsimile of November 29, 2001, wherein you requested our views as to whether section 7 would apply to an employee benefit plan ("EBP") where the EBP acquires treasury shares of a corporation that is related to the employer who contributes to the EBP.

Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R4, dated January 29, 2001. If the concerns relate to transactions that have already been completed, we would suggest that the employer corporation submit the enquiry to its local tax services office, along with all relevant documentation, for review. Consequently, we can only provide the following general comments.

Whether the acquisition of shares of a corporation by an EBP would be subject to section 7 of the Act is a question of fact. In the context of a ruling request, we would review all of the facts to determine whether there would be an agreement to issue shares and whether section 7 of the Act would be applied to the particular situation.

We have previously concluded that, where employer contributions to a trust established for the benefit of its employees are used to acquire treasury shares of the employer corporation or a corporation related to the employer corporation, the plan or arrangement will be considered to constitute an agreement to sell or issue shares as contemplated by section 7 of the Act. Where this is the case, the employee will include a taxable benefit under section 7 of the Act and the employer will be denied a deduction for its contributions that are used to acquire the shares pursuant to paragraph 7(3)(b) of the Act. This result was supported by the judgments in M.N.R. v. Chrysler Canada Ltd. et al. (92 DTC 6346) and The Queen v. Placer Dome Inc. (92 DTC 6402).

We trust these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate