1 May 1997 External T.I. 9709575 - EPSP PAYMENTS

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:

1.Can profits of a foreign controlled affiliate be considered in calculating EPPS contibutions?

2.Does sec. 67 apply with respect to deductions in respect of EPSP contributions for non-resident employees?

3.Do withholding provisions apply with respect to amounts paid to non resident employees under an EPSP?

Position: 1. Yes.	 2. Yes.	 3. No.

Reasons:

1.144 includes referance to profits of related corporation.

2.Previosly established position in file 931352.

3.Previously developed position discussed in E9213866.

XXXXXXXXXX 970957

Attention: XXXXXXXXXX

May 1, 1997

Dear Sirs:

Re: Employee Profit Sharing Plan ("EPSP")

This is in reply to your letter of February 21, 1997, with respect to the application of various provisions of the Income Tax Act (the "Act") with respect to an EPSP. Your questions and our replies are as follow:

Question 1

Are the profits of a controlled foreign affiliate taken into account by a taxpayer when determining EPSP payments computed by reference to profits allowed pursuant to subsection 144(1) of the Act?

Our Comments

Paragraph (a) of the proposed definition of "employees profit sharing plan" in subsection 144(1) of the Act defines an EPSP (in part) as a plan under which payments computed by reference to

(i)an employer's profits from the employer's business,

(ii) the profits from a business of a corporation with which the employer does not deal at arm's length, or

(iii) any combination of the amounts described under (i) and (ii)

are required to be made by the employer to a trustee under the arrangement for the benefit of employees of the employer or of a corporation with which it does not deal at arm's length.

There are no other provisions of the Act which preclude the reference under (ii) or (iii) to profits of any particular type of corporation. Accordingly, the profits of an incorporated, non-resident, controlled affiliate of an employer, that does not deal with the employer at arm's length may be referred to in computing the employer's contributions to an EPSP

Question 2

Is the payment from an EPSP pursuant to subsection 144(5) of the Act, required to be reasonable pursuant to section 67 and paragraph 20(1)(w) of the Act if a portion of the amount paid by a taxpayer is allocated to non-resident employees of a corporation with which the taxpayer does not deal at arm's length?

Our Comments

We confirm that amounts deductible pursuant to subsection 144(5) and paragraph 20(1)(w) of the Act by employers participating in EPSPs will be subject to the provisions of section 67 of the Act. Accordingly the amount deductible by an employer may be limited where payments to an EPSP are allocated to non-resident employees of a corporation with which a taxpayer does not deal at arm's length. The extent to which an outlay or expense is reasonable in any circumstance is a question of fact.

Question 3

Will section 105 of the Income Tax Regulations (the "Regulations) and part XIII of the Act apply to amounts paid to non-resident employees of a corporation with which a taxpayer does not deal at arm's length, where the employees do not perform any services in Canada and the amounts are paid out of an EPSP subsequent to an allocation of amounts to employees under the terms of the EPSP?

Our Comments

We confirm that section 105 of the Regulations and part XIII of the Act will not apply to the payment of amounts as described.

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