Anonymised, illustrative composite. A founder wanted four managers to earn into ownership together, so a trust held the shares instead of options. The trust document did not track the one subsection that keeps trust-held shares out of the general trustee rule.
At a glance
The founder of an Ontario CCPC specialty electronics distributor wanted four long-serving managers to become part-owners together, rather than granting individual options to one successor. The plan: a trust would hold 40% of the company’s shares, with each manager’s interest vesting over five years as revenue and margin targets were met.
The founder’s advisor drafted a discretionary employee benefit trust of the kind used for public-company share plans — the trustee held the shares for the benefit of “the participating employees as a class,” with discretion to reallocate a departing participant’s unvested interest among those remaining, so nobody lost out if a colleague left early.
That discretionary structure is the normal design for a trust meant to survive turnover. It is also not the structure section 7(6) of the Income Tax Act describes. The tax advisor brought in to review the plan before implementation found the class-based, reallocable design did not fit the specific arrangement the subsection requires — securities sold or issued to a trustee to be held for sale to identified employees under an agreement with each of them — and that meant the plan would not get the treatment the founder was assuming it would.
The trust was to acquire 40% of the company’s shares, appraised at $520,000 for that block at the time the plan was to be implemented. Vesting was scheduled over five years, at the end of which the same block was projected, on the founder’s own growth plan, to be worth roughly $1,050,000.
Under the discretionary structure as first drafted, each manager’s prospective benefit would have been valued and potentially taxable from the date the trust took the shares — before any manager had vested, before any of them could sell anything, and years before any of them would have cash from the business to fund a tax bill on paper.
Section 7(1.1) is what makes a CCPC option arrangement attractive in the first place: for a Canadian-controlled private corporation, it re-reads the taxation year that matters under paragraph (1)(a), so that “the reference in that paragraph to ‘the taxation year in which the employee acquired the securities’ shall be read as a reference to ‘the taxation year in which the employee disposed of or exchanged the securities’.” The tax bill waits for the sale.
Section 7(6) is the provision that lets a trust-held arrangement access that same deferral. It applies where “a particular qualifying person has entered into an arrangement under which securities… are sold or issued… to a trustee to be held by the trustee in trust for sale to an employee” of the corporation, and its effect is to deem the employee’s rights under that specific arrangement to be “rights under a particular agreement with the particular person under which the particular person has agreed to sell or issue securities to the employee” — folding the trust arrangement into the ordinary section 7(1)/(1.1) framework, and expressly switching off the general trustee rule: “subsection (2) does not apply in respect of securities held by the trustee under the arrangement.”
Without that fit, section 7(2) is the default rule for any security “held by a trustee in trust or otherwise, whether absolutely, conditionally or contingently, for an employee”: the employee “is deemed… (a) to have acquired the security at the time the trust began to so hold it; and (b) to have exchanged or disposed of the security at the time the trust exchanged it or disposed of it to any person other than the employee.” The acquisition date is fixed to when the trust took the shares — not to vesting, not to a later sale-and-purchase agreement with the individual employee — and because section 7(2) is not the arrangement section 7(1.1) was written to apply to, the CCPC deferral has no foothold to attach to.
The discretionary, class-wide design was exactly what took the plan out of section 7(6): there was no single “agreement… to sell or issue securities to the employee” for each named manager, only a trust holding shares for a shifting class with trustee discretion over final allocation. That is a real, structural gap, not a labelling problem — renaming the same discretionary trust an “employee share trust” would not have closed it.
The plan was rebuilt before any shares were allocated: four separate agreements, one per named manager, each specifying the exact number of shares the trustee was agreed to sell or issue to that individual on vesting, with no residual trustee discretion to reallocate a departing participant’s shares to the others without a fresh agreement. That structure tracks section 7(6)'s own description of the arrangement it protects.
The rebuild cost roughly three weeks of legal drafting and required the founder to decide in advance, rather than leave to the trustee’s discretion later, what would happen to a departing manager’s unvested shares — the plan settled on those shares reverting to the founder’s own holding rather than being reallocated, which removed the ambiguity that had caused the section 7(6) gap in the first place.
Left as drafted, each manager’s prospective benefit would have been exposed to tax on a timeline detached from their own ability to raise the cash — the CCPC deferral built to solve exactly that problem would never have engaged, because the arrangement fell to section 7(2) instead of section 7(1.1). The plan’s entire premise, giving four employees a path to ownership without an up-front cash outlay, would have created the same liquidity trap it was designed to avoid, on shares in a company none of them could yet sell.
The tell was a share plan copied from a public-company template without checking whether its trustee-discretion features — standard, sensible design for a large plan with many participants and predictable turnover — survive contact with a specific Income Tax Act subsection written around a narrower fact pattern. A trust “for the employees as a class” and a trust “to be held for sale to an employee” under section 7(6) sound similar and are not the same arrangement in law.
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