24 October 1989 Income Tax Severed Letter AC74312 - Employee's Profit Sharing Plan

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.

Registration Directorate            Rulings Directorate
Registered Pension & Deferred       Financial Industries Division
   Income Plans Division            W.C. Harding
Room 4029                           957-3499
400 Cumberland

Attention:  Doris Hobbs                         7-4312

Employee's Profit Sharing Plan (EPSP)
          Deferred Profit Sharing Plan
          Deferred profit Sharing Plan

This is in response to your memorandum of September 9, 1989 in respect of the above-noted EPSP and our subsequent discussions thereon.

The legal representatives of the plans have requested a meeting with Rulings in order for them to make representations on the validity of the employer's contribution formula used in the subject EPSP. In previous correspondence with them, Registration has advised that the formula is not in accordance with the Department's requirements as detailed in paragraphs 19 and 59 of Information Circular 77-lR3, and that it must be amended if it is to continue to qualify as an EPSP for purposes of the Income Tax Act (the Act). The representatives, on the other hand, have submitted that the rewording of the formula is adequate as the Act does not, of itself, require the use of a minimum contribution formula.

While we are prepared to meet with the representatives, should it be necessary, we are of the view that a written response to their concerns should first be issued from your office. We in particular believe that registration should write 85, after reviewing the most recent terms of the company's DPSPs, we feel that there are flaws in all of the plans contribution formulas which need to be addressed by you.

Turning to our views on the Department's EPSP and DPSP formula requirements, we are of the opinion that these are fully supportable in law as they were largely developed on the basis of the decisions of the courts found in Lade vs MNR, 1964 CTC 305 (copy attached) as confirmed by the Supreme Court as reported in 1965 CTC 525. In summary, the Court found (underlining added):

   "(i)    That because the effect of Section 79 was contrary to
         the normal tax consequences of the transactions
         described therein it had to be strictly construed;

    (ii)   That an "employees profit sharing plan" required the 
         adoption of a set formula to work out by reference to
         the employer's profits the amount of such profits to be
         distributed to employees, regardless of whether or not
         the employees themselves also made payments to the
         trustee;

    (iii)  That a plan would not fail to qualify as an "employees
         profit sharing plan" merely because the employer made a
         contribution from funds other than from profits, or when
         there were no profits, provided that payments cited by
         reference to profits were made in the event of profits;
         (and)

    (iv)   That "profits" could be broadly interpreted to mean 
         profits after taxes in the case of a corporation;"

Clearly, a formula must be present in a plan and a minimum contribution must be made in the event of profits. (Note: Section 79 of the former Act is analogous to Section 144 of the present Act.)

While providing the above ruling, it is conceded that the courts did not specify what minimum was required. In our research we also could not determine a source for the figures used in the circular and expect these may be found in Registrations' files. Nevertheless, we suspect that the minimas were developed first in consideration of the courts rulings and secondly to establish when a plan is an EPSP (or DPSP) and not some other form of savings plan. We noted in our research that the Department has had some success in attacking EPSP plans which were in fact, shams, created to achieve a tax avoidance. Most notably, see Hamilton Motor Products (1963) Ltd. 67 DTC 338.

As noted above, in our review we examined the provisions of the two DPSPs operated by 24(1) From our discussions (Bobbs/Harding) we understand that these two plans are for two different classes of employees of the corporation although this is not specified in the plans.

24(1)

It is clear from these provisions that there no required contribution to the 24(1) in that the first 1% of net profits must go to the 24(1) and any contribution in excess of the 1% may go to either plan.

We are not certain whether or not your practice is to accept a provision such as that proposed for the 24(1) however, it is our view that each plan must stand alone in meeting the requirements of the Act and the "either/or" clause proposed in the 24(1) is not acceptable.

for Director Financial Industries Division Rulings Directorate