28 June 1996 External T.I. 9606365 - EPSP MINIMUM CONTRIBUTION

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:

Minimum contribution to an EPSP

Position:

If the calculation is by "referance to profits", 1% is the minumum. Where the calculation is "out of profits" & the 144(10) election is made, then the payments must be limited by the level of profits.

Reasons:

Position taken in IT-280R.

			5-960636
XXXXXXXXXX		Franklyn S. Gillman

Attention: XXXXXXXXXX

June 28, 1996

Dear Sirs:

Re: Employee Profit Sharing Plan ("EPSP")
Minimum Contribution Requirements

This is in reply to your letter dated February 16, 1996 wherein you requested clarification as to the minimum contribution requirements by an employer to an EPSP.

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.

Paragraph 2 of IT-280R states that "... Contributions computed by reference to profits have to be expressed as a percentage of profits for the year and the minimum contribution permitted cannot be less than 1% of profits."

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.

For your perusal, we are enclosing a copy of Interpretation Bulletin IT-280R.

These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case. As stated in paragraph 21 of Information Circular 70-6R2 written opinions are not advance rulings and, accordingly, are not binding on the Department.

We trust these comments will be of assistance.

Yours truly,

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

Enclosures