19 July 2002 Internal T.I. 2002-0129737 - EMPLOYEE PROFIT SHARING PLAN - SR & ED

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: Where employee profit sharing plans constitutes the only form of remuneration, are the allocations "salary or wages" for SR&ED purposes.

Position: Yes, except for prescribed proxy amount.

Reasons: Pursuant to definition of salary and wages in 248(1), it includes amounts under 6(1)(d), but see Reg 2900(4) and (9) for the proxy amount.

		July 19, 2002

	SR&ED Directorate	Income Tax Rulings
	Financial Legislative	  Directorate
	   Application Section	B.G. Dodd
		957-8954
	Attention:  Connie Ng

		2002-012973

Employee Profit Sharing Plan - Salaries or Wages

We are writing in reply to your memorandum dated March 19, 2002.

The situation you describe is one in which a corporation is remunerating its employees through an employee profit sharing plan ("EPSP") as described in section 144 of the Income Tax Act (the "Act"). The corporation makes monthly contributions to the EPSP trust account, equal to the amounts which the employees would otherwise have earned as salary, and the trust allocates, and, in fact, pays, the same amount to the employees on a monthly basis. There are no residual amounts in the EPSP for investing. Employees receive no other remuneration.

The issues with which you are concerned are:

(1) whether the amounts so contributed by the corporation and paid to the employees under the EPSP constitute salaries or wages;

(2) whether such amounts would constitute SR&ED salaries under the proxy or traditional method; and

(3) if not, whether the amounts would qualify as other directly attributable amounts under the traditional method.

Our Comments

Given the requirements of the Act pertaining to EPSP's, including that whereby the payments by the employer must be computed with reference to profits, there may be a concern whether an arrangement of this nature would, in fact, qualify as an EPSP. A determination would require a review of all the relevant facts, including the terms of the plan. Assuming for purposes of this discussion that the plan does so qualify, we offer the following comments.

Issue 1

The term "salary or wages" is defined in subsection 248(1) of the Act, in part, to mean the income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part I. This meaning applies for purposes of the Act generally, with exceptions made expressly for purposes of sections 5 and 63 and the definition of death benefit in subsection 248(1), and accordingly, is relevant for purposes of sections 37 and 127 of the Act.

Income from an office or employment as computed under subdivision a of Division B of Part I of the Act is computed with reference to sections 5 to 8 inclusive. In the case of amounts allocated to a taxpayer under an EPSP, these are included as income from an office or employment pursuant to paragraph 6(1)(d) of the Act and accordingly, constitute salary or wages as defined in subsection 248(1) of the Act. In our view, this is the case whether from the perspective of the employee or the employer.

Issue 2

With respect to the question of whether such amounts would constitute SR&ED salaries under the proxy method, as discussed above, the definition of salary or wages in subsection 248(1) of the Act is applicable for purposes of section 37 thereof. Accordingly, where a taxpayer has elected under clause 37(8)(a)(ii)(B) of the Act, it is our view that amounts allocated to a taxpayer under the EPSP would constitute salary or wages for purposes of subclause 37(8)(a)(ii)(B)(IV) of the Act and to the extent they otherwise qualify thereunder (i.e., the employees are directly engaged in SR&ED, etc.), would be included in the SR&ED pool under subparagraph 37(1)(a)(i) of the Act. Such amounts would constitute a "qualified expenditure" as defined in subsection 127(9) of the Act by virtue of subparagraph (a)(ii) of that definition.

In the case of the investment tax credit under subsection 127(5) of the Act and the proxy method, pursuant to subsection 2900(4) of the Income Tax Regulations (the "Regulations"), the prescribed proxy amount is determined with reference to the relevant "portion of the amount incurred in the year by the taxpayer in respect of salary or wages of an employee ...". Subsection 2900(9) of the Regulations provides that an amount incurred in respect of salary or wages of an employee does not include, as described in paragraph (a) thereof, an amount described in section 6 or 7 of the Act. Given that amounts allocated to a taxpayer under an EPSP are described in section 6 (specifically paragraph (1)(d) thereof), such amounts are not included as an amount incurred in respect of salary or wages for purposes of the prescribed proxy amount in subsection 2900(4) of the Regulations.

In the case of the traditional method, given that the definition of salary or wages in subsection 248(1) of the Act is applicable for purposes of section 37, it is our view that amounts allocated to a taxpayer under the EPSP would constitute salary or wages and would be included in subparagraph 37(1)(a)(i) provided they satisfy the "all or substantially all" or the "directly attributable" requirements of subclause 37(8)(a)(ii)(A)(I) or (II) respectively. Where this is so, such amounts would constitute a "qualified expenditure" as defined in subsection 127(9) of the Act by virtue of subparagraph (a)(ii) of that definition.

Issue 3

In view of our comments with respect to the first two issues, the third need not be addressed.

Other

It is our view that the amounts allocated to a taxpayer under the EPSP would constitute salary or wages for SR&ED purposes for the employer irrespective of the fact that the EPSP may be the only form of remuneration for the employees. We have not considered whether this type of situation is one to which subsection 245(2) might apply. In a specific case we would first wish to ensure that an EPSP of this nature in fact qualifies as such under the provisions of the Act.

We hope this will be of assistance.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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