2015-0581311E5 Application of section 7 to employee share purchase

Principal Issues: Whether section 7 applies where an employee of an operating company purchases shares of the company from a holding company that does not deal at arm’s length with the operating company.

Position: Yes.

Reasons: Fits clearly within section 7. There is an agreement to sell shares of an employer corporation to an employee. The employer corporation does not deal at arm's length with the corporation that is selling the shares.

Author: Wurtele, Dave
Section: 7

XXXXXXXXXX                                                                                                                             2015-058131
                                                                                                                                                     D. Wurtele

June 1, 2015

Dear XXXXXXXXXX:

Re: Application of section 7 to employee share purchase

This is in reply to your email of April 14, 2015 in which you ask whether section 7 of the Income Tax Act (the “Act”) would apply in the following situation:

*     A holding company (Holdco) owns substantially all of the issued shares of an operating company (Opco). 
*     Holdco has agreed to sell shares of Opco to one of Opco’s employees.
*     While it is intended that the employee will purchase the shares at fair market value, it is possible that the fair market value ultimately determined may be greater than the amount paid by the employee for the shares.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Section 7 of the Act applies where a corporation agrees to sell or issue shares of the corporation or shares of a corporation with which it does not deal at arm's length to an employee of either corporation or to an employee of another corporation with which it does not deal at arm's length. As the situation you describe meets these conditions, it is our view that section 7 of the Act would apply.

We trust our comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CPA, CA
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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