4 December 2000 External T.I. 2000-0055055 - EPSP ELECTION SALARY

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 Department.

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

Principal Issues: 1) Can we confirm that an election under subsection 144(10) has to made in the same calendar year that the amount is contributed to the EPSP? 2) Can we confirm the payment of a shareholder/manager/employee's total salary through an EPSP would be reasonable for purposes of the Act?

Position: 1) Yes. 2) No.

Reasons: 1) This is consistent with position previously taken. 2) We can only make such a determination after a review of all of the facts including the terms of the EPSP.

XXXXXXXXXX 2000-005505
M. P. Sarazin
December 4, 2000

Dear Sir:

Re: Employee Profit Sharing Plans

This is in reply to your letter of November 7, 2000, requesting clarification of previous technical interpretations relating to the "out of profits" election described in subsection 144(10) of the Income Tax Act (the "Act") and the payment of salary to an owner/employee through an employee profit sharing plan ("EPSP").

Clarification #1

In technical interpretation 963734, the Canada Customs and Revenue Agency (the "Agency") stated that an election made by an employer under subsection 144(10) of the Act will have effect for the taxation year of the EPSP in which it is filed. You would like confirmation that an employer that makes a contribution to an EPSP on or before April 30 of Year 2 in respect of profits earned for the fiscal year ended on December 31 of Year 1 has to make the election under subsection 144(10) of the Act before December 31 of Year 2.

Position

An election by an employer will have effect for the taxation year of the EPSP trust in which it is filed. Since an EPSP's taxation year ends on December 31, the employer would have to file the subsection 144(10) "out of profits" election by December 31 of the year that the employer makes a contribution to the EPSP. Consequently, in the above example, the employer would have to file the election under subsection 144(10) of the Act by December 31 of Year 2.

Clarification #2

In technical interpretation 952843, the Agency confirmed that the response to part 3 of Question 42 presented at the 1981 Canadian Tax Conference Round Table (the "Question") would apply to the determination of the reasonableness of contributions to an EPSP. However, in technical interpretation 2000-001711, the Agency stated that it was a question of fact whether an arrangement would satisfy the conditions of section 144 of the Act where an employee is paid his or her total salary through an EPSP. You would like confirmation that the payment of an employee's total salary through an EPSP would be considered reasonable where the employee is the principal shareholder/manager of the employer corporation since this would be consistent with the response to part 3 of the Question.

Position

The determination of whether a specific arrangement where an employee, who may or may not be the principal shareholder/manager, is paid his or her total salary through an EPSP would satisfy the conditions of section 144 of the Act is a question of fact. We remain of the view that this issue can only be dealt with on a case by case basis and only through an application for an advance income tax ruling.

We trust that our comments will be of assistance.

Yours truly,

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