20 July 1993 Income Tax Severed Letter 9315475 - Employee Profit Sharing Plan—Minimum Contribution

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 Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                              7-931547
XXXXXXXXXX                                    D. S. Delorey
                                              (613) 957-8953

Attention: XXXXXXXXXX

July 20, 1993

Dear Sirs:

This is in reply to your letter, dated February 17, 1993 and received in this office on May 24, 1993, concerning the requirement to contribute a minimum amount to an employees profit sharing plan ("EPSP") as defined in subsection 144(1) of the Income Tax Act (the "Act").

In particular, you ask

(a) if it is still the Department's position that current contributions equal to a minimum of 1% of profits must be made to the EPSP by the employer,

and

(b) if qualification of a plan as an EPSP is jeopardized where the employer contribution formula reduces the amount of the employer contribution for the year by the amount of forfeitures that are allocated to plan beneficiaries in that year. That is, the plan

      (i)   clearly allocates forfeitures completely to
            employees each year, and

      (ii)  the employer contribution for the year is first
            determined by reference to or out of profits and
            is then reduced by the amount of any forfeitures
            that have been allocated.

Our Comments

Your enquiry appears to relate to a particular plan. Confirmation of the tax implications inherent in a particular plan is given by this Directorate only where the plan is the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where the plan is already in place, the enquiry should be forwarded to the relevant District Taxation Office. We offer, however, the following general comments.

It remains the Department's position that the employer's contribution should be at least 1% of profits. This position is, however, currently being reconsidered. If the amount of the employer's current contributions is reduced by the amount of forfeitures, the Department's current position would be complied with only where the amount of the reduced contribution is equal to at least 1% of profits.

Should the Department adopt the position that a certain minimum contribution is not required, an EPSP must nevertheless contain an obligation upon the employer to contribute to the plan and a realistic formula for the determination of such contributions in any year in which a profit is realized. This requirement is explained in paragraph 2 of Interpretation Bulletin IT-280 . Completely offsetting the employer's otherwise required current years contributions by the amount of forfeitures would be inconsistent with this obligation.

Our comments are an expression of opinion only and are not binding on the Department as explained in paragraph 21 of Information Circular 70-6R2. We trust, however, that they are of assistance.

Yours truly,

for Director Financial Industries Division Rulings Directorate

HAA 7213-1