11 September 1995 External T.I. 9522615 - PROFIT SHARING PLAN, SDA, EPSP

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:

Would a profit sharing plan be a salary deferral arrangement?

Position TAKEN:

Question of Fact.

Reasons FOR POSITION TAKEN:

Proposed transactions without any details provided.

		952261
XXXXXXXXXX		M.P. Sarazin

Attention: XXXXXXXXXX

September 11, 1995

Dear Sirs:

Re: Proposed Profit Sharing Plan

This is in reply to your letter dated July 20, 1995, and addressed to the Ottawa Tax Services office wherein you requested opinions with respect to a proposed profit sharing plan. Your letter has been forwarded to us for our consideration.

Comments

It appears that the interpretation you seek relates to proposed transactions to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto issued on September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. However, the Department will not rule where an issue to be considered involves an opinion on generally accepted accounting principles. Nevertheless, we can provide you with the following general comments.

An "employees profit sharing plan" ("EPSP"), as defined in subsection 144(1) of the the Income Tax Act (the "Act"), is an arrangement that allows an employer to share business profits with all or a designated group of employees. In order to qualify as an EPSP, the employer has to pay an amount, computed by reference to profits, to a trustee to be held and invested for the benefit of the employees who are members of the plan. A plan or arrangement would not qualify as an EPSP unless all of the conditions found in subsection 144(1) of the Act are satisfied.

A plan or arrangement could be a salary deferral arrangement, within the meaning assigned by subsection 248(1) of the Act, if it provides an employee with a right to receive current salary or wages in a later taxation year or years and one of the main purposes for the creation of the right is to defer the payment of tax. The expression "salary or wages" is defined in subsection 248(1) of the Act to include income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part I of the Act. We note, however, that it is a question of fact whether a plan or arrangement would qualify as a salary deferral arrangement.

At the 1984 Canadian Tax Foundation conference, it was stated that, generally speaking, a debt obligation is considered to arise whenever a binding liability is created and the principal amount of the liability can be quantified. In a situation where a plan or arrangement is not set out in a written agreement, it would be a question of fact as to whether or not the particular plan or arrangement creates a "debt obligation".

The value of any benefit received by an employee would be included in the employee's employment income pursuant to paragraph 6(1)(a) of the Act. Where a right received under the plan or arrangement represents a debt obligation to the employer then we are of the view that the value of the right received in the year should be included in the employee's employment under paragraph 6(1)(a) of the Act unless the amount is already included in income under the provisions of subsection 6(11) of the Act.

Your plan is similar to an arrangement referred to as a stock appreciation rights plan so we refer you to ATR-45 which outlines our positions on these types of arrangements.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c.Source Deductions Division

Attention: B. Larocque

Ottawa Tax Sercices Office
Employer Services
Attention: Cynthia Gauvreau