11 February 2019 External T.I. 2018-0738561E5 - Employer contributions

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: 1. Can an EPSP be amended to remove the employer’s obligation to make contributions? 2. If not, can this requirement be waived?

Position: 1. No. 2. No.

Reasons: 1. Paragraph (a) of the EPSP definition in subsection 144(1) provides that an employer is required to make contributions by reference to profits, or “out of profits” if an election under subsection 144(10) is filed, under the plan. 2. There is no legislative basis to waive this requirement.

XXXXXXXXXX								2018-073856
K. Podor
February 11, 2019

Dear XXXXXXXXXX:

Re: Employer contributions to an EPSP

This is in reply to your correspondence of January 4, 2018 concerning the employer contribution requirements for employees profit sharing plans (EPSPs). We apologize for the delay in our response.

You describe a situation where, following a corporate restructuring, an employer “closed” its EPSP and has not contributed to the plan since January 1, 2017. However, the plan continues to be administered as if it were a valid EPSP for purposes of the Income Tax Act (the “Act”). You refer to the minimum contribution requirement set out in paragraph 6 of Interpretation Bulletin IT-280R, Employees Profit Sharing Plans – Payments Computed by Reference to Profits, and ask whether this requirement may be waived under the circumstances.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R8, Advance Income Tax Rulings and Technical Interpretations.

An EPSP, as defined in subsection 144(1) of the Act, is an arrangement that allows an employer to share business profits with all or a designated group of employees. One of the requirements to qualify as an EPSP is that the employer make payments computed by reference to profits, or out of profits if an election is made under subsection 144(10) of the Act, to a trustee to be held and invested for the benefit of the employees who are members of the plan. This means that there must be a binding obligation on the employer to make contributions pursuant to the plan’s contribution formula, and that such contributions must actually be made in the event of profits. If the terms of a valid EPSP were subsequently amended to remove the employer’s obligation to make contributions, the arrangement would no longer meet this requirement and would cease to qualify as an EPSP at that time. The CRA has no authority to waive this requirement.

The tax implications associated with an arrangement that ceased to be an EPSP would depend on whether the arrangement continues as a salary deferral arrangement, retirement compensation arrangement or an employee benefit plan. This is a question of fact that can only be determined by reviewing the terms of the plan and the relevant facts of the particular situation.

We trust these comments will be of assistance.

Yours truly,

Dave Wurtele
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch