19 November 1996 External T.I. 9637345 - RETROACTIVE 144(10) ELECTION

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:

Can a subsection 144(10) election be filed with effect for previous taxation years.

Position:

No - election must be filed in the taxation year for which the arrangement is intended to be treated as an employees profit sharing plan.

Reasons:

Legislation is silent but allocations to employees which are included in their income must take place in the EPSP trust's taxation year and employer contributions in the year are deductible only to the extent they are made to an EPSP, so election must be filed in timely manner to ascertain tax consequences. (Note, if plan is not an EPSP, it could be 1) an EBP which means employer contributions would not be deductible til year amounts distributed to employees, and if retroactive election were effective, would allow employer to change nature of payment and accelerate deduction for non-statute barred years; this would be most significant difference but also capital gains/losses and taxable dividends can be flowed through to beneficiaries of EPSP while all EBP benefits are employment income; 2) an RCA which is subject to 50% refundable tax; or 3) an SDA which has same timing for taxation as EPSP but which would be employment income only and no flow-through.)

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Attention: XXXXXXXXXX

November 19, 1996

Re: Election Under Subsection 144(10) of the Income Tax Act (the "Act")

This is in reply to your facsimile transmission of November 6, 1996, in which you ask whether an employer can file an election under the above-noted provision with retroactive effect.

It is our view that the election under subsection 144(10) can only have current and prospective effect. An election by an employer will have effect for the taxation year of the employee profit sharing plan trust in which it is filed, and will continue to have effect for future taxation years so long as the plan terms are not amended and employer participants are not changed.

To determine the taxation consequences resulting from the existence of a plan the terms of which provide that employer contributions will be made out of profits where a timely election has not been made, please provide the details to your local taxation services office. Such an arrangement might be a "salary deferral arrangement", a "retirement compensation arrangement" or an "employee benefit plan " all of which are defined terms in 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