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:
Whether employee savings plan contributions by employer are currently deductible.
Position TAKEN:
Yes, if the plan is a thrift plan; no, if the plan is an EBP, or a section 7 plan where employer contributions are used to purchase treasury shares.
Reasons FOR POSITION TAKEN:
Routine except situation where employer contribution to thrift plan takes the form of employer shares purchased on open market; this type of contribution may favour characterization of plan as an EBP.
Canadian Petroleum Tax Society Conference
June 7, 1995
Question No. 10
EMPLOYEE SAVINGS AND SHARE PURCHASE PLANS
Situation 1
An employee savings plan typically envisions the employer matching dollar for dollar the portion of an employee's remuneration so designated by the employee to be set aside for savings. The matching amount contributed by the employer is reported as additional remuneration on the employee's T4 slip.
Situation 2
The employee savings plan is identical to the one outlined under Situation 1 with the only difference being that the employer will purchase company shares on the open market and match the employee contribution on a value basis by contributing company shares.
Situation 3
The employee savings plan is identical to the one outlined in Situation 1 with the only difference being that the employer will issue company shares from treasury and match the employee contribution on a value basis by contributing the company shares out of treasury.
Please confirm that the employer would be allowed a current deduction for the amounts it contributes to the employee savings plan in all three situations. If you conclude that the employer is precluded from a current deduction, please provide the reasoning.
Department's Position
Situation 1
The tax treatment of amounts contributed into and received out of an employee savings plan depends on the plan's terms and characteristics. As explained in paragraph 32 of Interpretation Bulletin IT-502 ("Employee Benefit Plans and Employee Trusts") when an employee savings plan is structured in such a way that the employer's contribution is a payment of salary and paid to the plan custodian at the direction of the employee, amounts contributed to the plan by the employer are immediately taxed in the employee's hands under subsection 5(1) of the Act and the employer will be entitled to a current deduction. These plans are what are sometimes referred to as "thrift plans". Note that the mere reporting of an amount on a T4 slip for an employee or the signing by the employee of a direction for the payment of an amount into a trust may not be sufficient to establish that the amount is the employee's. The employee must also obtain all rights to the amount and these rights must be obtained prior to the employer's contribution of the amount to the trust.
Should it be determined that the amounts contributed by the employer are not by right those of the employee, the plan may be an "employee benefit plan" (EBP) as defined in subsection 248(1) of the Act and the employer's deduction would be governed by the provisions of section 32.1 of the Act. Basically, in these circumstances the deduction could not be taken until the year the amounts were received out of the plan by the employee.
Situation 2
If the employer's contributions take the form of employer shares purchased on the open market or are used by the custodian to purchase employer shares on the open market, the employer's deduction will be available to the same extent and at the same time as described under Situation 1 above.
As noted in our answer in 1 above, the employer contribution to a thrift plan must be made at the direction of the employee and the employee must have an absolute right to such amount. Where the employer contribution takes the form of employer shares, this may indicate a lack of employee discretion and favour characterization of the plan as an EBP.
The Department's position on the use of employer contributions to an EBP for the purchase of employer shares on the open market is described in ATR-17 ("Employee Benefit Plan - Purchase of Company Shares").
Situation 3
Where the employer's contributions are shares issued from treasury, the plan will be considered to constitute an agreement to sell or issue shares as contemplated by subsection 7(1) of the Act. Therefore, in accordance with paragraph 7(3)(a) of the Act, the employee will incur a taxable benefit under section 7 and not under any other Part 1 provision and, in accordance with paragraph 7(3)(b) of the Act, the employer will be denied a deduction. This result is in accordance with the judgments in M.N.R. v. Chrysler Canada Ltd. et al. (92 DTC 6346 Federal Court, Trial Division) and The Queen v. Placer Dome Inc. (92 DTC 6402 Federal Court of Appeal).
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