Tax Court Rules on Employee Benefit Plans
McNeeley v. The Queen 2020 TCC 90
The three Appellants appealed their 2012 reassessments indicating the Minister of National Revenue’s (“Minister”) position that they had received corporate shares from a trust that constituted an employee benefit plan (EBP) as provided for in the Income Tax Act (“Act”). Accordingly, each Appellant should have reported the fair market value of received shares as income from an office or employment. The Appellants had instead reported the aggregate fair market values of their received shares as trust capital distributions, pursuant to s. 107 of the Act. The appellants argued that the reassessments were wrong, on the basis that the trust distributing the shares was a “prescribed trust” pursuant to section 4800.1 of the Income Tax Regulations (regulation 4800.1). The Tax Court of Canada (“TCC”) disagreed and dismissed the appeals.
In 1999, one of the three appellants -Mr. Baker – founded a learning software business named D2L Corporation (D2L). At all relevant times each appellant was a D2L employee. Also at all relevant times Mr. Baker was the president and chief executive officer of D2L, and until 2006 its sole shareholder. In 2005 Mr. Baker’s mother contributed $210 in the settlement of a trust named Desire2Learn Employee Stock Trust (Trust), in accordance with the terms of a written agreement (Trust Agreement) signed by her as settlor and by the Trust’s then three trustees, one of whom at all relevant times was the appellant Mr. Baker.
The Trust Agreement provided that the Trust was established, “…for the benefit of certain employees of [D2L] and its affiliates…”. Beneficiaries of the Trust had to be full-time employees of D2L. The Trust’s objects were to acquire D2L securities to be held for the benefit of the beneficiaries. The Trust’s trustees were to allocate and distribute any number of the Trust’s shares to any one or more of the beneficiaries. On January 1, 2006, the Trust subscribed for 2,950 Class B common shares of D2L at their aggregate fair market value of $10. Mr. Baker sold his D2L shares to his wholly owned corporation, 2089785 Ontario Inc. (208Co). Further reorganizational activities took place.
On January 2, 2011, D2L Holdings Inc. (D2L Parent) was incorporated, and D2L became D2L Parent’s wholly-owned subsidiary. The Trust exchanged its 2,950 D2L Class B common shares for an equal number of D2L Parent Class B common shares.
On August 20, 2012, Mr. Baker caused 2339351 Ontario Inc. (233Co) to be incorporated. On August 23, 2012 he sold a portion of his 208Co shareholdings to 233Co for 1,000 233Co common shares and elected under subsection 85(1) re that sale.
On August 24, 2012, D2L Parent amalgamated with 208Co and the amalgamated company retained the name D2L Holdings Inc. (amalgamated D2L Holdings). On amalgamation the 2,950 D2L Parent Class B common shares held by the Trust were exchanged for inter alia 3,705,344 non-voting amalgamated D2L Holdings Class B common shares (B Shares). On the same day, and with each B Share having a fair market value of $8.41, the Trust distributed 3,356,415 B Shares to various beneficiaries, including 2,317,109 to Mr. Baker and 71,772.18 to Mr. Chapman.
Importantly, the Trust elected, pursuant to subsection 107(2.001) of the Act, to apply subsection 107(2.1) in respect of the August 24, 2012 distribution of B Shares to beneficiaries other than Mr. Baker. The Trust reported a taxable capital gain of 50% of the fair market value of the B Shares distributed to the beneficiaries other than Mr. Baker, as the B Shares’ adjusted cost base was nominal.The Trust filed on the basis that subsection 107(2) applied to deem Mr. Baker to have received his August 24, 2012 distribution of 2,317,209 B Shares at their nominal adjusted cost base.
On August 24, 2012, the Trust beneficiaries who received B Shares on that date (other than Mr. Baker) sold their 1,039,306 B Shares to 233Co for the aggregate sum of $8,745,760. On that same day Mr. Baker sold his 2,317,109 B Shares to 233Co in exchange for shares of 233Co having a fair market value equal to that of the transferred B Shares. He did not report a gain on this sale as a subsection 85(1) election had been filed.
On October 15, 2012, with each B Share having a fair market value of $8.41, the Trust distributed its remaining 348,929 B Shares to 227 beneficiaries, including 707.66 to Mr. McNeeley and 50,384.96 to Mr. Baker.
The Trust elected the same way it did on August 24, 2012, electing under subsection 107(2.001) of the Act to apply subsection 107(2.1) to the October 15, 2012 distribution of B Shares. The Trust accordingly reported a taxable capital gain equal to 50% of the fair market value of the B Shares then distributed, on the basis that the B Shares’ adjusted cost base was nominal. On that same day, Mr. Baker sold his 50,384.96 B Shares to 233Co for $423,991.
The issues to be decided by the TCC were as follows:
- was the trust an EBP?
- was the trust a prescribed trust?
- if the particular trust was both an EBP and a prescribed trust, do prescribed trust rules in the Act supersede EBP rules in the Act applicable to trusts?
- did th eEBP trust rules in the Act not apply to the two share distributions that Mr. Baker received, on the asserted basis that in his circumstances paragraph 6(1)(a) would not apply?
Decision & Analysis
- Was the Trust an EBP?
The Crown’s position was that the Trust was an EBP as defined in subsection 248(1) of the Act. An EBP is defined as follows:
“employee benefit plan” means an arrangement under which contributions are made by an employer or by any person with whom the employer does not deal at arm’s length to another person (in this Act referred to as the “custodian” of an employee benefit plan) and under which one or more payments are to be made to or for the benefit of employees or former employees of the employer or persons who do not deal at arm’s length with any such employer or former employer (other than a payment that, if section 6 were read without reference to subparagraph 6(1)(a)(ii) and paragraph 6(1)(g), would not be required to be included in computing the income of the recipient or of an employee or former employee), but does not include any portion of the arrangement that is…[(a)…(b)…(c)…(c.1)…(c.2)…(d)…(e).
The TCC found that the Trust was an EBP for the purposes of the Act.
Was the Trust a Prescribed Trust?
The Appellants’ position was that the Trust was a prescribed trust under Regulation 4800.1. The TCC disagreed and found that the Trust was not a prescribed trust, mainly because the relevant statutory provision (subsection 108(1)) excludes EBP’s from the definition of ‘trust’. This also dispensed with the third issue.
Did the EBP trust rules in the Act not apply to the two share distributions that Mr. Baker received, on the asserted basis that in his circumstances paragraph 6(1)(a) would not apply?
Mr. Baker argued that the amounts would not have been taxable based on the plain wording of the relevant provisions. Thus, they could not be considered EBP payments and should not be taxed as such. The TCC found that the EBP rules applied, since Mr. Baker could not definitively prove that he did not receive the shares in the course of his employment.
From a logical and common sense perspective it seems unassailable that simply by being a D2L employee, Mr. Baker (and no less Messrs. McNeeley and Chapman) received his benefit of B Shares from the Trust which was expressly established to benefit employees. Thus, in the words of paragraph 6(1)(a), he received the benefit “by virtue of” that employment. The Trust could not have benefitted him with any of its B Shares had he not been a D2L employee – regardless that also he was the founder of D2L’s business.
The appeals were therefore dismissed with costs to the Respondent.
 For a full recitation of relevant facts, please see paragraph 6 of the Decision.
 At paragraph 56.