8 February 1994 Internal T.I. 9329697 F - EPSP of XXXXXXXXXX

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:

Whether subject plan is an employees profit sharing plan within meaning of subsection 144(1) of the Act.

POSITION TAKEN:

Plan qualifies as employees profit sharing plan except for minimum contribution as required by para. 19 of IC 77-1R3.

REASONS FOR POSITION TAKEN:

Terms of the plan meet the definition in 144(1) if all participating employers file the required election under 144(10) of the Act; administrative position re minimum contribution by "out of profits" plan is being maintained although currently under review.

FINANCE OPINION:

N/A

JURISPRUDENCE:

N/A

RCT PUBLICATIONS:

I.C. 77-1R3, para. 19 applied notwithstanding withdrawal of I.C. and replacement by I.C. 77-1R4 which deals only with DPSP's.

HAA NUMBER:

7213-1

February 8, 1994

XXXXXXXXXX

Enclosed is a letter of September 27, 1993, and attachments thereto from the above-named employer which was forwarded to us by your office.

We reviewed the documents submitted by XXXXXXXXXX and forwarded copies of those relating to the subsection 144(10) election to the Registered Plans Division, the area responsible for these elections.

We are returning the original letter and attachments so that you may reply to XXXXXXXXXX concerning its request that the Department confirm that its Stock Purchase Incentive Plan (the "Plan") is an "employees profit sharing plan" (EPSP) within the meaning of subsections 144(1) and 248(1) of the Income Tax Act (the "Act"). Since the Plan is already established, we are unable to reply directly to XXXXXXXXXX but we provide the following comments to you for your assistance in drafting a reply.

LAW

Subsection 144(1) requires that the employer make payments "computed by reference to his profits from his business" to a trustee in trust for the benefit of employees and officers. Subsection 144(10) states that if the arrangement provides that the employer payments are to be made "out of profits" then the employer may elect to have the arrangement deemed to be an arrangement for payments "computed by reference to his profits from his business". Subsection 144(1) also lists a number of conditions that the trustee must meet each year respecting the allocation of amounts, profits and capital gains and losses, to the beneficiaries under the plan.

Other provisions under section 144 relate to the taxation of the beneficiaries, the employer, and the trust under the EPSP; the issue of whether the arrangement is an EPSP is determined solely by reference to subsections 144(1) and (10) of the Act. Amendments to subsections 144(1) and (10) as proposed in the August 30, 1993 Draft Legislation released by the Department of Finance do not affect the foregoing comments.

TERMS OF XXXXXXXXXX ARRANGEMENT

We reviewed the terms of the Plan, Trust Agreement, and Directors' Resolution required for purposes of subsection 144(10) and find that the documents meet the requirements of the Act, but fail to meet the requirement set out in paragraph 19 of Information Circular 77-1R3 concerning minimum employer contributions.

In particular,

XXXXXXXXXX

In accordance with subsection 144(10) of the Act and Income Tax Act Regulation 1500(3), each employer has submitted a letter stating that it elects to have the arrangement qualify as an EPSP, the Directors' resolution and a copy of the Plan and Trust Agreement. (The letter from the XXXXXXXXXX states that the other two employers have submitted the required documents to the Department; all three participating employers must make the election under subsection 144(10) of the Act for the arrangement to qualify. If the documents have not been received by you or Registered Plans Division, you should advise XXXXXXXXXX that a valid election cannot be made unless documents from the other two employers are submitted.)

The Trust Agreement evidences that payments made by the employer will be retained by the Trustee for the benefit of the employees (paragraphs 3 and 4) and that the Trustee will allocate as required by the "Tax Act" (paragraph 6). Although the latter statement does not indicate how allocations will be made, subsection 144(1) of the Act does not require that the terms of the arrangement contain the specifics of allocation. Paragraph XXXXXXXXXX of the Plan list the conditions under which payments are made for the benefit of employees.

INFORMATION FOR EMPLOYERS

An employee who withdraws pursuant to paragraph XXXXXXXXXX of the Plan may be subject to forfeiture of contributions made in the year of withdrawal, and you may wish to draw the employers' attention to paragraph 144(1)(d) and subsection 144(9) of the Act and the amendment to subsection 144(9) proposed in the August 30, 1993 release noted above.

Since investments will be made in shares, dividends will be reinvested in shares and payments shall or may be made to beneficiaries in specie, paragraphs 144(3)(e) and (7)(g), and subsections 144(7.1) and (8) of the Act will also be relevant. The proposed amendment to subsection 144(9) will make the forfeiture provision relate in a specific manner to taxable dividends previously allocated.

CONCLUSION

In our opinion, the arrangement under XXXXXXXXXX Plan, Trust Agreement and Directors' Resolution is an "employees profit sharing plan" within the meaning of subsections 248(1) and 144(1) of the Act provided a minimum employer contribution is inserted in the Plan and the election under subsection 144(10) of the Act by all participating employers is confirmed.

Please note that although I.C. 77-1R3 has been superseded by I.C. 77- 1R4, the position in paragraph 19 of the third version is still valid.

The position is under review, and its continuation, withdrawal or amendment will be confirmed in Interpretation Bulletin IT-280 when the next revision is released.

If you have any questions concerning the technical interpretation of provisions relating to employees profit sharing plans, please contact us. As noted above, documents pertaining to the subsection 144(10) election should be submitted to Registered Plans Division.

for DirectorFinancial Industries DivisionRulings Directorate

c.c.:      Robert Grabs      Registered Plans Division