8 January 2013 External T.I. 2011-0412181E5 - Request for Comments - EPSP

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.

Principal Issues: The taxpayer is requesting our comments regarding the Canadian tax implications of contributions to an employee profit sharing plan (EPSP) in the case of resident and non-resident employees.

Position: General comments provided. Taxpayer must request an advance tax ruling in the manner set out in Information Circular 70-6R5.

Reasons: IC70-6R5

XXXXXXXXXX
2011-041218
K. Podor
January 8, 2013

Dear XXXXXXXXXX:

Re: Request for Comments – Employee Profit Sharing Plan (EPSP)

This is in response to your correspondence wherein you requested our opinion on the application of section 144 of the Income Tax Act (the "Act") to particular fact situations.

The Income Tax Rulings Directorate may only provide written confirmation of the tax implications inherent in particular situations when the transactions involved are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency (CRA) publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menue.html. Accordingly, we cannot provide you with specific answers to your inquiry at this time. However, we can provide the following comments, which are general in nature and are not binding on the CRA.

In order to assist you with the general application of the law to an employee profit sharing plan (EPSP), we refer you to the following CRA publications:

• Income Tax Interpretation Bulletin (IT) No. 280R and No. 280RSR, "Employees Profit Sharing Plans – Payments Computed by Reference to Profits"
• IT No. 379R, "Employees Profit Sharing Plans – Allocations to Beneficiaries"

In addition, the following documents issued by our Directorate may provide useful information that can help you to understand how the law has been applied by the CRA in situations involving non-resident employees. Copies of these documents may be obtained from various internet tax publishers:

• E9128995, "Use of Related Employer's Profits for EPSP"
• E9306745, "Employee Profit Sharing Plan"
• E9516265, "EPSP – Non-Resident Beneficiaries"
• E9709575, "EPSP Payments"
• 2000-0036107, "EPSP – Withholding Requirements"

In addition, you may wish to consider the amendments under Part XI.4, "Tax on Excess EPSP Amounts", of the Act which introduce limitations on EPSP contributions, particularly in respect of non-arm's length employees. New subsection 207.8(2) of the Act imposes a special tax on a "specified employee" who has an "excess EPSP amount" for a taxation year. In general terms, an "excess EPSP amount" is the portion of an employer's EPSP contribution (allocated by the trustee to a specified employee for a taxation year) that exceeds 20% of the salary received in the year by the specified employee from the employer or by a corporation with which the employer does not deal at arm's length. The tax is imposed at the top federal rate plus the top provincial rate for the relevant province. A "specified employee" is defined in subsection 248(1) of the Act and generally includes an employee who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of the capital stock of their employer or who does not deal at arm's length with their employer. This measure applies in respect of EPSP contributions made by an employer on or after March 29, 2012, other than contributions made before 2013 pursuant to a legally binding obligation arising under a written agreement or arrangement entered into before March 29, 2012.

We trust these comments are helpful.

Lita Krantz, CA
Assistant Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch