4 June 1991 Internal T.I. 9109287 F - Employee Profit Sharing Plan

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.

7-910928

Re: Employee Profit Sharing Plan (EPSP) Investments in      24(1)

We are writing in reply to your memorandum of April 4, 1991, concerning the above-noted matter and further to our telephone conversation (Spice/Lauzière) of April 17, 1991.  You enclosed copies of letters from the above-named taxpayer dated February 19 and March 4, 1991 and a copy of your letter to the taxpayer of February 26, 1991.

You asked us to comment on the following three issues:

1.        whether an insurance company could act as an agent for the trustee of the EPSP;

2.        whether "negative interest" can be deducted by an employee beneficiary of an EPSP pursuant to subsection 20(20) of the Income Tax Act (the "Act"); and

3.        whether a deemed capital loss of the EPSP pursuant to subsection 138.1(3) of the Act can be flowed through to the employee/beneficiary of the EPSP pursuant to subsection 144(4) of the Act.

Our replies in order of these queries are:

1.     The insurance company can act as an agent for the trustee of the EPSP if the agency is established in writing and it is evident that the ultimate responsibility for the administration of the plan rests with the trustee.  The delegation of clerical duties by the trustee to an agent is not prohibited by the Act.

2.     Interest income included in computing the income of the trust and allocated by the trust is included in the employee's income in the  year.  If, upon withdrawal, the employee receives a lesser amount of interest income than was allocated to him, the tax credit in subsection 144(9)(i) available to him.  The deduction under subsection 20(20) of the Act is available only to a taxpayer who disposes of a interest in a life insurance policy who previously had included amounts in income under, in this case, subsection 12.2(3) of the Act.

     Subsection 12.2(3) of the Act refers to amounts included in the income of a taxpayer who holds an interest in a life insurance policy, which amounts reflect the excess of the "accumulating funds" over the adjusted cost base of the taxpayer's interest.

     In our opinion, an employee does not "hold an interest" in a life insurance policy.  The inclusions in the employee's income result from the provisions of section 144 and paragraph 6(1)(d) of the Act, not from subsection 12.2(3).

3.     The capital loss of a segregated fund trust is deemed to be the capital loss of the policy holder or beneficiary, in this case the trustee of the EPSP (subsection 138.1(3) of the Act).

     In turn, the capital loss of the trust, to the extent it is allocated to the employee beneficiary, shall be deemed to be the capital loss of the employee pursuant to subsection 144(4).  The flow through, however, results from allocation by the trustee of the loss associated with the trust's property.  It does not result, as described in the taxpayer's letter of February 19th, from a loss associated with the employee's property.

Direct ownership of the units by the employee would preclude the existence of the EPSP since all investments of an EPSP trust must be held by the trustee.

for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch