17 July 2001 External T.I. 2001-0087855 - TREATMENT OF EPSP FORFEITED AMOUNTS

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. Must forfeited amounts be allocated at the end of the year?

2. Can forfeited amounts be allocated to former employees?

3. Where an employee is terminated, not vested, and rehired in the same year, can the employee claim the deduction under subsection 144(9)?

Position:

1. No.

2. No, unless the allocations to former employees are the allocation of amounts that were vested and payable to them as a consequence of their termination.

3. Yes.

Reasons:

1. The Act requires forfeitures to be allocated in each year, it does not specify when in the year forfeitures are to be allocated.

2. The provisions of 144(1) require amounts allocated under subparagraphs (i) through (v) to be allocated in each year to employees.

3. Subsection 144(9) does not permit recognition of the forfeiture in the year of termination and rehire, but the forfeiture may be recognized under 144(9) when the employee subsequently ceases to be a beneficiary under the plan.

XXXXXXXXXX 								2001-008785
G. Allen
July 17, 2001

Dear XXXXXXXXXX:

Re: Employees Profit Sharing Plans ("EPSPs") & Forfeitures

This letter is in reply to your facsimile dated June 11, 2001, in which you asked several questions concerning the above-referenced topic. We will respond to your questions in the order in which they were posed.

The definition of EPSP in subsection 144(1) of the Income Tax Act (the "Act") requires that forfeited amounts be allocated on an annual basis. Subparagraph 144(1)(b)(v) of the Act does not specify when during the year forfeited amounts must be allocated, only that the amounts be allocated in each year.

Paragraph 144(1)(b) of the Act provides that the amounts allocated in accordance with subparagraphs (i) through (v), must be allocated annually to employees of the employer or of a corporation with which the employer does not deal at arms length. Accordingly, it is our opinion that forfeited amounts cannot be allocated to former employees. However, where an employee is vested and subsequently terminates employment, amounts which are payable to the former employee as a consequence of their termination may be allocated and paid to the former employee.

In general, a deduction under subsection 144(9) of the Act is permitted where an amount has been allocated contingently to a person, is included in the person's income, the amount is not vested at the time the person ceases to be a beneficiary under the EPSP and the person does not become a beneficiary under the plan after that time and in the year. Where an employee's employment is terminated, the employee is subsequently rehired, and again becomes a beneficiary under the plan in the same year of the forfeiture, subsection 144(9) will apply to delay recognition of the forfeiture until the employee subsequently ceases to be a beneficiary under the plan.

We trust the above comments will be of assistance.

Mickey Sarazin, CA
For Director
Financial Industries Division
Income Tax Rulings Directorate