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.
A number of queries concerning proper accounting for EPSP expenses and whether deductible if paid or allocated to the employer or the employee. Also whether employer's contribution can be reduced by amount of forfeitures in the year or whether expenses can be charged against forfeitures.
Expenses of trust may be charged against trust income and against employer contributions; employer may pay expenses directly which will be considered a contribution to EPSP and deductible by employer as such; employee may not take a deduction for expenses allocated to or paid by employee; forfeitures may be used to reduce excess of employer contributions over minimum required by Department; forfeitures may not be used to pay expenses unless first allocated to employees.
Reasons FOR POSITION TAKEN:
Department's position as expressed in IT-379 or in previous opinion letters. Position concerning employer payment of expenses being treated as contribution to EPSP - because deductible to employer if contribution and taxable benefit to employee if contribution.
June 24, 1994
Re: Employees Profit Sharing Plan (EPSP)
This is in reply to your letter of May 9, 1994, in which you ask several questions concerning the above-noted topic. Although the Rulings Directorate provides technical interpretations of the provisions of the Income Tax Act (unless as otherwise stated all references to this statute are to the Income Tax Act S.C. 1970-71-72, c. 63 as amended, consolidated to June 10, 1993 - the "Act"), they are not binding on the Department unless they are provided in the context of an advance ruling.
Reference is made to your questions (some have been paraphrased and renumbered) with our replies following.
1.Will an EPSP which qualifies under subsection 144(10) of the Act retain its status as an EPSP if it provides that employer contributions are reduced by the amount of forfeitures allocated to employees during the year?
ANSWER:The Department's current position concerning minimum employer contributions to an EPSP is set out in Information Circular 77-1R3, paragraphs 56 and 19. (Although I.C. 77-1R4 has been issued with respect to deferred profit sharing plans, comments concerning EPSP's in the previous version of the Circular are still valid.) For an "out of profits" plan the formula determining the employer's contributions must provide for a minimum contribution every year of the lesser of $100 per employee member and an amount calculated by, for example, reference to a percentage of the employees' annual contributions or salaries.
If the employer's required current year contribution is totally offset by the amount of forfeitures allocated in the year it would not be possible to satisfy the obligation to make the minimum contribution. However, the Department is willing to accept a formula permitting allocated forfeitures to be used to offset the excess of employer contributions over the required minimum contribution. Thus, if the formula provides that the employer contribute the lesser of $200 per member per year and 2% of members' salaries, forfeitures may offset the employer's contribution up to the lesser of $100 per member per year and 1% of members' salaries.
2.If the employer pays the administration fees and commissions relating to the EPSP:
(a)Would the employer be entitled to a deduction for those fees paid by it?
(b)Would the amount of fees paid by the employer constitute a taxable benefit to the plan's participants.
ANSWER:If the administration fees are paid by the employer the amount will be considered a contribution to an EPSP which is required to be allocated to the employees in the year. Thus, it will be deductible to the employer as a contribution to the EPSP, and taxable to the employee members as amounts allocated in accordance with paragraph 144(1)(a) of the Act. Please note that certain expenses relating to capital property may not be expensed but must be added to the capital cost of the property (for example, sales commissions relating to the purchase of mutual fund trust units).
3.If the employer established a group registered retirement savings plan (RRSP) and a mutual fund investment plan for its employees:
(a)Would the employer be entitled to a deduction for the payment of the plans' administration fees?
(b)Would the amount of fees paid by the employer constitute a taxable benefit to the plans' participants?
(c)Are fees charged to the mutual fund investment plan deductible by the employees if (i) paid directly by the employees; or (ii) charged to their participants' accounts?
ANSWER:With respect to the group RRSP, the employer may pay the plans' administration fees and take a deduction to the extent permitted by the Act.
The Department's position concerning the taxable benefit associated with the employer payment of a group RRSP's administration fees is set out in paragraph 46 of Information Circular 72-22R8.
We do not have sufficient information concerning the mutual fund investment plan to comment.
4.Can the administration fees and commissions relating to the EPSP be paid out of forfeitures, with the balance, if any, being paid by the employer? Can the EPSP participants' accounts be charged with these expenses as opposed to the forfeiture account, with the balance being paid by the employer?
ANSWER:To answer the second part of the question first, an EPSP can provide that the administration fees be charged directly to the participants' accounts. Forfeitures which have been allocated to the employees in accordance with paragraph 144(1)(d) of the Act may also be used to cover the administration fees of the EPSP, but this is essentially a direct charge of the fees to the participants' accounts. Any expenses paid directly by the employer will be considered a contribution to the EPSP as discussed in 2 above. As also discussed in 2 above, "commissions" may constitute a capital expenditure, the amount of which must be added to the cost of the property - see 5 below.
5.Are commissions on buying and selling shares "operating expenses" or "expenses relating to the normal operation of the trust" as discussed in IT-379?
ANSWER:Brokerage fees or commissions incurred to purchase securities are part of the cost of the security. If they are incurred to sell the security, they can be deducted from the proceeds of disposition of the property when calculating the gain or loss.
6(a).Are the amounts allocated to the participants pursuant to paragraphs 144(1)(a) (employer contributions), (b) (profits from property), and (d) (forfeitures) of the Act the gross amounts or net amounts after deduction for related expenses?
ANSWER:The charging of expenses against employer contributions is permitted as stated in paragraph 2 of IT-379.
Paragraph 144(1)(b) requires the trustee to allocate "profits from trust property" which means the net amount after expenses. As discussed in paragraph 1 of IT-379, the trust is allowed to deduct from gross income (which excludes employer contributions, capital gains, and forfeitures), reasonable expenses relating to the normal operation of the trust. For a general discussion on determining the net income of a trust subject to Part I tax, please refer to the 1993 T3 Guide and Trust Return at pages 18 to 21 ("Step 3, Calculating net income, Lines 21 to 50"). This discussion may assist even though it is not specifically applicable to a non-taxable EPSP.
As confirmed in our previous letter, amounts forfeited in the year are not income to an EPSP and the Department has not adopted an administrative position to permit expenses to be charged against forfeitures.
6(b).How are the expenses reported by the EPSP trustee on the T4PS or other reporting documentation?
ANSWER:Pursuant to paragraph 221(1)(d) of the Act and section 212 of the Income Tax Regulations thereto, every trustee (or the employer instead of such trustee - see subsection 212(2) of the Regulations) of a trust governed by an EPSP shall make an information return in prescribed form. The prescribed forms, T4PS Summary and Supplementary, must be completed in respect of amounts allocated by the trustee, either contingently or absolutely, in the calender year for which the return is filed, to individual officers or employees who are beneficiaries under the plan.
The trustee of the EPSP should maintain records to support the calculation of "profits from trust property", the charging of expenses against the gross income from property including interest income, taxable dividends and foreign source income, and the charging, if any, of expenses against employer contributions to arrive at the net figure to be allocated (see comments in next paragraph); however, an EPSP is not required to file any return or any documentation with respect to these calculations.
The T4PS segment, summary and supplementary will not contain any information with respect to the expenses of the trust but will show the amount (net or gross) of employer contributions (included in the area entitled "other income"), profits (a net amount) from property (including an area on the slip which breaks down the actual and taxable amount of dividends from taxable Canadian corporations, and an area for interest), and the (gross) amount of forfeitures (included in the "other income" area).
6(c).Is the employee entitled to a deduction for any of the EPSP expenses?
6(d).If it is the gross amount of forfeitures that is allocated to the employee and the employee is not entitled to a deduction for EPSP operating expenses, where and to what extent would such expenses be deductible?
ANSWER:Expenses are deductible in arriving at the amount of the EPSP's "profit from property" and may be netted against employer contributions; otherwise, the employer may contribute an amount to the trust to pay its expenses and that amount will be an amount to be allocated to the employees in accordance with paragraph 144(1)(a) of the Act and deductible to the employer to the extent permitted by subsection 144(5) and paragraph 20(1)(w) of the Act.
7.Must either the amount of forfeitures or the amount of expenses which are allocated to/charged against the participants be allocated to every participant in the plan?
ANSWER:Reference should be made to the terms of the plan document and trust law concerning the reallocation of amounts forfeited by former participants in the plan and the charging of expenses. In the absence of any explicit requirements in the constituting document or under trust law, we believe the following method would be appropriate.
With respect to forfeitures allocation (whether or not the employer is using forfeitures to offset current year contributions as permitted to the extent described in our answer to 1 above), the allocation should be in the same proportion that the employer's required contribution to the participant bears to the total of required contributions to all participants.
Operating expenses must first be charged against the source in order to arrive at the amount representing the trust's profits from property. Expenses which are not related to the earning of a particular type of income and administrative fees may be charged to the participant's account in the same proportion that the total of the amounts allocated to the participant's account in the year bears to the total of amounts allocated to all participants.
We trust the foregoing comments satisfactorily address the issues you have raised.
Financial Industries Division
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