14 November 1996 External T.I. 9635555 - EPSP EXPENSES REDUCING EMPLOYER CONTRIBUTIONS

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 employer contributions to EPSP must be allocated to employees or can be off-set completely by interest expense of EPSP trust.

Position:

Confirmed para. 2 of IT-379 position; but this plan as described is probably not an EPSP but rather a section 7 arrangement or EBP.

Reasons:

Employer contributions are equal to interest expense - bear no relation to profits.

XXXXXXXXXX							963555

Attention: XXXXXXXXXX

November 14, 1996

Re: Off-setting Employer Contributions To Employees Profit Sharing Plan

This is in reply to your letter of October 24, 1996, in which you describe a proposed employees profit sharing plan ("EPSP") and the linking of employer contributions to the interest expense of the plan trust. You ask whether the total employer contributions in the year can be reduced by the interest expense or must be allocated in full to employees in the year.

Your question relates to a proposed transaction and we are unable to confirm the tax consequences except in the context of an advance income tax ruling. We have the following general comments.

In Interpretation Bulletin IT-379, paragraph 2, the position is stated that operating expenses, including carrying charges, of the EPSP trust are to be charged against "other income". Certain amounts, one of which is "employer contributions", are excluded from the meaning of "other income". The paragraph concludes that any expenses which cannot be applied against "other income" must be charged against four described amounts, one of which is "employer contributions".

In a previous technical interpretation of May 15, 1991 (E9112265), we were asked to comment on the deduction of interest paid by an EPSP from employer contributions for the purpose of determining the required allocations to members and concluded by referring to the Department's position in paragraph 2 of the aforementioned Interpretation Bulletin.

We question, however, whether the plan you have described would meet the definition of an "employees profit sharing plan" set out in subsection 144(1) of the Income Tax Act (the "Act"). Although you have not indicated whether the plan is intended to meet the definition in subsection 144(1) of the Act or is deemed to so meet it by virtue of subsection 144(10) of the Act, it does not appear to be a "profit sharing" plan as contemplated by the Act. For a general description of a plan which meets the definition in subsection 144(1) of the Act please refer to paragraphs 2 through 5 of Interpretation Bulletin IT-280R and the Special Release thereto. Please refer to paragraphs 6 though 8 of IT-280R for a discussion of "out of profits" formulas which the Department considers acceptable.

You have described a plan which is established to borrow funds and to invest those funds in the employer's shares. It is not intended that the employer contributions represent any profit sharing; rather the amount to be contributed by the employer is equal to the interest expense incurred by the plan trust for its borrowings.

In our view it is unlikely that such a plan will qualify as an EPSP under the Act. We also advise that if it is intended that shares will be issued or sold to employees at less than fair market value and the plan trust acquires employer shares from the employer or a corporation that does not deal at arm's length with the employer, the tax consequences for both employees and employer would be determined under section 7 of the Act.

If section 7 does not apply, it is our view that the plan will likely meet the definition of an "employee benefit plan" as contained in subsection 248(1) of the Act although, depending on the circumstances, such a plan might be a "salary deferral arrangement" or "retirement compensation arrangement" (see subsection 248(1) of the Act).

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