28 April 1994 External T.I. 9405365 - USE OF EPSP FORFEITURES TO COVER PLAN EXPENSES

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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

Whether EPSP forfeitures are income of the EPSP against which expenses can be charged.

Position TAKEN:

No.

Reasons FOR POSITION TAKEN:

Forfeitures are not income to the EPSP - they are amounts (some of which were trust income in previous years) that were allocated in previous years and which must be allocated again when a beneficiary forfeits the amounts and is entitled to a tax credit (proposed deduction).

XXXXXXXXXX 940536

Attention: XXXXXXXXXX

April 28, 1994

Dear Sirs:

Re: Administration Fees of Employees Profit Sharing Plan

This is in reply to your letter of February 7, 1994, which was forwarded to us by the Calgary District Office. You refer to a statement in paragraph 2 of Interpretation Bulletin IT-379 ("Employees Profit Sharing Plans - Allocation to Beneficiaries") that operating expenses are to be charged against "other income", and ask whether forfeitures as described in paragraph 144(1)(d) of the Income Tax Act (the "Act") constitute "other income". You also ask for our views on the meaning of "other income" as used in IT-379. Lastly, in the event it is our opinion that forfeitures do not constitute "other income", you ask whether forfeitures constitute receipts described in (a) to (d) of paragraph 2 of IT-379 against which expenses must be charged in a manner which is at the discretion of the EPSP trustees.

The amounts described in paragraph 144(1)(d) are amounts that were previously allocated by the trustees to employees, but which amounts have not and will not be received by the employees because the employees have ceased to be beneficiaries under the EPSP and have forfeited the amounts under the terms of the EPSP. Forfeited amounts must be reallocated by the trustees to the remaining beneficiaries under the EPSP in the year in which the employee ceases to be a beneficiary under the EPSP.

Such amounts are not income of the EPSP in the year they are forfeited. Forfeitures represent amounts described in paragraphs 144(1)(a) through (c) of the Act which were allocated in previous years. Subsection 144(1) of the Act is not intended to define income of an EPSP; it is meant to impose a requirement to allocate EPSP receipts to the employees so that there is an employment income inclusion to the employees in the year.

In our view, income of an EPSP would include amounts described as income in Division B of the Act. Thus, operating expenses could be charged against such income amounts in accordance with the guidelines in paragraph 2 of IT-379. "Other income" as used in that paragraph excludes the specific amounts (which we would point out are not all "income" as that word is used in the Act) in (a) through (h); it would include, for example, rental income, royalties and business income.

Finally, and in accordance with our comments in the third paragraph of this letter, forfeitures are not receipts in the year of forfeiture "described in (a) to (d) of Section 2 of IT-379".

To conclude, no expenses should be charged against forfeitures.

The foregoing comments are an expression of opinion only and are, therefore, not binding on the Department. We trust, however, that they are of assistance.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate