19 February 1996 External T.I. 9526485 - EMPLOYEES PROFIT SHARING PLANS

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:

1)Is a particular formula for an EPSP acceptable.

2)Is an employee having the option to voluntarily opt in and out of the plan an acceptable definition of member for an EPSP.

3) Will the above violate para. 9 of IT 280R.

Position:

1)As long as plan meets requirements of an EPSP and formula stated in para. 6 of IT-280R.

2)This would be an acceptable definition of member provided employer still able to meet minimum contributions as defined in the plan.

3) No as long as employer does not suspend contributions below an acceptable minimum as stated in the EPSP.

Reasons:

IT, various rulings given.

XXXXXXXXXX 5-952648

Attention: XXXXXXXXXX

February 19, 1996

Dear Sirs:

Re: Request for a technical interpretation of IT-280R

"Employees Profit Sharing Plans - Payments computed by reference to Profits"

This is in reply to your facsimile of October 4, 1995 in which you request a technical interpretation with respect to whether or not a particular formula would be an acceptable "out of profit" formula for determining employer contributions to an Employee Profit Sharing Plan ("EPSP").

Written confirmation of the tax implications inherent in particular proposed transactions are given by this Directorate only where the transactions are outlined in an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R2. Questions concerning actual fact situations should otherwise be directed to your district tax services office. Although we cannot provide a specific answer to your query, we offer the following general comments which are not binding on the Department.

An EPSP, as defined in subsection 144(1) of 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. However, subsection 144(10) of the Act states that if the arrangement provides that the employer payments are to be made "out of profits" then the employer may elect to have the arrangement deemed to be an arrangement for payments "computed by reference to his profits from his business", provided all the other requirements in subsection 144(1) of the Act are met.

As noted in paragraph 6 of IT-280R "... Accordingly, for a plan with an 'out of profit' formula, 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 employee's annual contributions or salaries." The IT then goes on to state in paragraph 7 "Other formulas will receive consideration, but a formula must not result in merely a nominal employer contribution so that the plan becomes primarily a savings plan for employees."

An employer's contribution in a year must be in accordance with the formula stated in the plan. Any provision in the plan to suspend employer contributions or to reduce them below an acceptable minimum will not be permitted.

In our view an acceptable definition of a member contained in an EPSP plan would include a provision which would allow the employee to voluntarily participate or not participate in the plan in the particular year in question, provided the employer would still be able to contribute at least the minimum amount required under the plan.

We trust our comments will be of assistance to you.

Yours truly,

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