3 October 1994 External T.I. 9424115 - EPSP FORFEITURES

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.

Principal Issues:treatment of EPSP forfeitures when beneficiary remains in plan.

Position TAKEN:stated provisions of EPSP legislation

Reasons FOR POSITION:Law is clear. Could lead to some double taxation for a period.

XXXXXXXXXX 5-942411

Attention: XXXXXXXXXX

October 3, 1994

Dear Sirs:

Re: Employees Profit Sharing Plans ("EPSPs")

This is in reply to your letter of September 19,1994, in which you asked a number of questions on the tax implications of a specific fact situation.

Since the subject of your enquiry relates to a factual proposal, we are unable to provide you with any specific comments on it at this time. Confirmations of the tax implications in particular proposals may only be provided by this Directorate where the transactions are the subject matter of an advance income tax ruling request submitted in the manner set out in the Department's Information Circular 70-6R2. However, while we are unable to address your specific situation, we can offer the following general comments on this topic.

Section 144(9) of the Income Tax Act (the "Act") only applies when a person ceases to be a member of an EPSP in a year and does not thereafter and in the year become a beneficiary under the plan.

In our opinion a contingent right to receive shares under the provisions of an EPSP would be a capital property the disposition of which could give rise to a capital loss or capital gain. However, in our opinion a contingent right to have shares vested in a beneficiary would not generally have any cost since that right is generally bestowed on the beneficiary gratuitously. Amounts allocated to a beneficiary in accordance with the provisions of subsection 144(3) of the Act are not part of the cost of that right.

Paragraph 144(1)(v) requires that an EPSP must allocate amounts that employees are entitled to deduct under subsection 144(9) because an employee ceases to be a member of a plan but there is no provision in the Act requiring the reallocation of amounts forfeited when a beneficiary does not cease to be a member of a plan in the year. On the other hand, subsection 144(3) of the Act does require the inclusion of all amounts allocated to employees under a plan other then those specified therein.

Subsection 144(5) of the Act allows a deduction from income to an employer for amounts paid by the employer to the trustee of an EPSP. The forfeiture by an employee of amounts allocated to the employee do not constitute payments to a plan by an employer.

The above comments are based on our understanding of the law as it applies in general and may or may not apply to the circumstances of a particular case. They do not form an advance income tax ruling and they are not binding on the Department.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch