7 March 1996 External T.I. 9528435 - "PROFITS" AS USED IN 144(1)

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 "profits" must be an "after-tax" amount as set out in IT-280R; 2) whether s. 67 reasonableness test is applied in the same manner to EPSP contributions as applied to bonuses and other remuneration; 3) does "profits" in 144(1) mean the same as "profits" in 144(10).

Position:

1) No;
2) Yes;
3) Yes

Reasons:

Reconsidered position in IT-280R; 2) logical extension since EPSP income is like salary and we have already adopted same criteria for RCA's; 3) see 931352.

		952843
XXXXXXXXXX	P. Spice

Attention: XXXXXXXXXX

March 7, 1996

Dear Sirs:

Re: Meaning of "Profits" for Purposes of Subsections 144(1) and (10) of the Income Tax Act

This is in reply to your letter of October 25, 1995, in which you ask for our views concerning the "employees profit sharing plan" provisions relating to employer contributions and the related deduction. In particular, you refer to the meaning of "profits" and the comment in paragraph 5 of Interpretation Bulletin IT-280R ("Employees Profit Sharing Plans - Payments Computed by Reference to Profits"). We apologize for the lengthy delay in replying which was necessitated by a review of our positions on these topics and the formulation of our present position as discussed below.

You describe a particular plan and situation and we are unable to confirm the Department's interpretation with respect to such particulars except in the context of an advance ruling request. We can provide the following general comments, however, although they are not binding on the Department.

Since the context in which the word "profits" is used in subsection 144(1) is similar to that of the definition of "profit sharing plan" in subsection 147(1) of the Income Tax Act (the "Act"), the word must be interpreted the same way in these two provisions. We do not agree, however, that "profits" or "profit" must bear the same meaning throughout the Act. There are various provisions in the Act which refer to "profit" or "profits" and the meaning of the word must be determined by reference to the specific provision and the spirit and intent of the legislation.

We have considered your comments on Lade v. M.N.R. (64 DTC 5189, Ex. Ct.) and agree that the dicta of Mr. Justice Noel does not support the position taken in paragraph 5 of Interpretation Bulletin IT-280R. The word "profits" was not defined by that case nor was the reference to the meaning of "profits" necessary for the resolution of the case. It was obiter, and as you suggest, merely a rejection by the Court of the Minister's contention (at page 5193) that other amounts besides business income could not be included in the profit base.

As a result of our reconsideration of these issues we are now prepared to extend the same treatment to employees profit sharing plans ("EPSPs") as we currently extend to deferred profit sharing plans as stated in paragraph 5 of Information Circular 77-1R4. In particular, this would permit of a definition of profits as net income before or after income tax. This change is effective immediately.

You also asked whether, in applying section 67 to EPSP contributions, the Department would use the same criteria that it currently applies with respect to the deductibility of bonuses and other remuneration paid to individual Canadian-resident owners of private corporations who are actively involved in the day-to-day operations of the active business carried on by the private corporations.

We confirm that our answer in part 3) of Question 42 of the 1981 Canadian Tax Foundation Round Table applies equally to the determination of the reasonableness of contributions to an EPSP. Note we have taken the same position with respect to contributions to a retirement compensation arrangement (letter of November 17, 1994, document no. 941845).

Lastly, you ask whether "profits" as used in subsection 144(1) has the same meaning as "profits" in subsection 144(10). In our view, the word must bear the same meaning. As stated in a previous technical interpretation (letter of July 20, 1993, document no. 931352):

The size of a payment under an arrangement where payments are made "out of profits" may have no relation to the size of the profits; a payment under an arrangement where payments are computed by reference to profits will vary directly in relation to the size of the profits. This, in our view, is the distinction between the two types of arrangement. What constitutes "profits" under either arrangement would not vary.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate

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