4 February 2002 External T.I. 2002-0119375 - CONTRIB. TO EMPLOYEE PROFIT SHARING

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 CCRA.

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

Principal Issues: Whether a payment made into an employee profit sharing plan in the first 120 days after a particular taxation year is deductible in the particular taxation year if the payer is a corporation that has elected pursuant to subsection 28(1) of the Act to use the "cash method" described therein.

Position: No

Reasons: The corporation's income from its farming or fishing income is deemed to be the amounts described in paragraphs 28(1)(a) to (d) less the amounts described in paragraphs 28(1)(e) to (g) of the Act. The amounts described in paragraph 28(1)(e) to (g) of the Act do not include a payment made to an employee profit sharing plan in the first 120 days after the taxation year.

XXXXXXXXXX 2002-011937
J. E. Grisé
February 4, 2002

Dear XXXXXXXXXX:

Re: Employee Profit Sharing Plan Contributions

This is in reply to your letter of January 11, 2002, requesting our interpretation with respect to an amount paid by an employer to a trustee under an employees profit sharing plan as defined in subsection 144(1) of the Income Tax Act (the Act).

The situation you are concerned with is where the employer is a corporation that carries on the business of farming, has made an election pursuant to subsection 28(1) of the Act to use the "cash method" and the payment to the trustee is made in the first 120 days after a particular taxation year.

Paragraph 20(1)(w) of the Act allows a taxpayer to deduct, in computing the taxpayer's income for a taxation year from a business, an amount paid to a trustee in trust for employees of the taxpayer, under an employees profit sharing plan as permitted in section 144 of the Act. Subsection 144(5) of the Act permits such a deduction if the payment is made during the taxation year or within 120 days thereafter. It is clear that a deduction would be available to the corporation in the particular year if the corporation had not made an election to use the cash method.

The income from a farming business of a corporation that has elected to use the cash method is deemed to be the amounts described in paragraphs 28(1)(a) to (d) of the Act less the amounts described in paragraphs 28(1)(e) to (g) of the Act. Paragraph 28(1)(e) of the Act, generally, entitles a taxpayer in the business of farming or fishing to deduct expenditures that meet the general tests of deductibility and would otherwise be deductible in the taxation year, a preceding taxation year or the following taxation year, which are paid in the taxation year or are deemed by the Act to have been paid in the taxation year. Paragraph 28(1)(e.1) of the Act deals with payments made in a previous year and paragraph 28(1)(f) of the Act permits a deduction for amounts included in the previous year's income in respect of inventory adjustments. Paragraph 28(1)(g) of the Act permits a deduction for certain amounts that are not paid in the year, such as, capital cost allowance under paragraph 20(1)(a) of the Act. The provisions listed in paragraph 28(1)(g) do not include paragraph 20(1)(w) of the Act. Accordingly, in our view, the amount contributed by a corporation, that has elected to use the cash method, to an employees profit sharing plan within 120 days after a particular taxation year will only deductible in the taxation year paid.

We hope our comments are helpful.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

??

- 2 -