29 July 1997 External T.I. 9712965 - REALLOCATION OF FORFEITURES

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:

	Writer wished to confirm his understanding of 144(1) and 	144(9) with respect to reallocation of amounts

Position:

Basic explanation of the provisions provided.

Reasons:

The writer had confused allocations required under 144(1) with allocation of shares to individual accounts under an EPSP. The former is required under the Act. The latter may be done for book keeping purposes but has no significance with respect to the taxation of EPSP allocations.

XXXXXXXXXX 971296

Attention: XXXXXXXXXX

July 29, 1997

Dear Sirs:

Re: Employee Profit Sharing Plans ("EPSPs")

This is in reply to your letter of May 8, 1997, in which you requested our comments on the application of section 144 of the Income Tax Act (the"Act") to a specific hypothetical scenario.

Since you indicate the scenario is typical of a number of existing EPSPs, we can not provide you with specific comments on the scenario at this time. Written determinations of the tax implications can only be given by the Department through your local Tax Services Office. However, we can provide the following general comments which may or may not apply to any particular situation.

Reference should be made to the Department's Interpretation Bulletin IT-280R Employee Profit Sharing Plans - Payments Computed by Reference to Profits (enclosed) and in particular to the provisions of paragraphs 2 through 3 thereof. A plan which provides that employer contributions are solely determined on the basis of $100 per employee plus a percentage of employee contributions is not acceptable under the provisions of subsection 144(1) of the Act. However such a formula may be acceptable under the provisions of subsection 144(10) of the Act as discussed in paragraphs 6 through 9 of the Bulletin.

We confirm that generally no disposition or reacquisition of shares by a trust governed by an EPSP will occur solely as a result of a forfeiture by a beneficiary of the EPSP.

We confirm that the wording of subparagraph 144(1)(b)(v) of the Act (as presently legislated) provides that the amount that must be allocated after 1991 and before a particular time is:

"the total of all amounts each of which is an amount that an employee is entitled to deduct under subsection (9) in computing income because the employee ceased to be a beneficiary under the plan in the year"

Subsection 144(9) of the Act provides that a deduction may be claimed by a person when the person ceases to be a beneficiary of an EPSP and thereby forfeits amounts previously included in income. The deduction is basically calculated as the total of all amounts forfeited that were previously included in income as a result of previous allocations, less certain adjustments for dividend tax credits and prior deductions. The deduction also does not include any amounts previously included in income that resulted from an allocation of any realized capital gains and losses to the person.

As an example assume an EPSP with two beneficiaries has had a contribution of $200 which was used to acquire two shares in year 1. One of the employees ceases to be a member of the plan in year 2 and forfeits all benefits. At that time the shares are worth $220. In Year 1, each beneficiary would be allocated $100 as a result of the contributions and each would be taxed on $100 income. In year 2, the employee who leaves the plan would be entitled to receive a deduction of $100.00, being the amount of income previously reported and now forfeited. The other employee would be allocated an identical amount under the provisions of subparagraph 144(1)(b)(v) and will be taxed on it in year 2. The Act does not require an allocation of the EPSP property to the beneficiaries and no portion of the unrealized gain on the shares held by the EPSP must be allocated to either beneficiary. However if and when these shares are disposed of, any actual gain must be allocated and assessed to the beneficiaries of the plan at that time in accordance with the provisions of the Act.

We trust this explanation of the provisions is satisfactory to your needs.

Yours truly,

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