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.
Principal Issues: Would executives of a corporation that offers a DPSP for some of its employees be prohibited from becoming plan members by virtue of their shareholdings in other corporations within the corporate group
Position: Yes.
Reasons: Based on the fact scenario in the example, all three would be specified shareholders and thus prohibited pursuant to paragraph 147(2)(k.2) of the Act from becoming beneficiaries of the DPSP.
June 14, 2004
HEADQUARTERS HEADQUARTERS
Registered Plans Division P. Kohnen, CMA
957-2093
Attention: David Pinard
2004-007477
Prohibited Beneficiaries of a DPSP
This is in response to an e-mail submission of June 3, 2004 from XXXXXXXXXX (the "consultant") of XXXXXXXXXX and our subsequent telephone conversation (Kohnen/Pinard) regarding a scenario in which three executives of a corporation would be prohibited beneficiaries of a deferred profit sharing plan ("DPSP").
In the scenario presented, Corporation A is owned by four shareholders; W owns XXXXXXXXXX % of the common shares, X owns XXXXXXXXXX% and Y and Z each own XXXXXXXXXX%. None of the four shareholders are "related persons", as defined in subsection 251(2) of the Income Tax Act (the "Act").
Corporation A owns XXXXXXXXXX common shares of Corporation B. The remaining XXXXXXXXXX shares of Corporation B are owned by W and his immediate family (all of whom are related persons pursuant to paragraph 251(2)(a) of the Act).
Corporation B owns all of the shares of Corporation C, which is considering establishing a DPSP for some of its employees. X, Y and Z are executives of Corporation C. The consultant has requested the views of the Canada Revenue Agency as to whether X, Y and Z may be beneficiaries of the DPSP.
Pursuant to the registration condition in subparagraph 147(2)(k.2)(ii) of the Act, no individual who is a person who is, or is related to, a specified shareholder of a participating employer or of a corporation related to the employer, may become a beneficiary under the DPSP.
The term "specified shareholder" is defined in subsection 248(1) of the Act. Pursuant to the definition, a taxpayer who owns 10% or more of the issued shares of any class of shares of a corporation or of any other corporation that is related to the corporation is a specified shareholder of the corporation. Accordingly, X, Y and Z are all specified shareholders of Company A.
Pursuant to subparagraph 251(2)(b)(i) of the Act, Corporation B, which controls Corporation C, is related to Corporation C. Pursuant to subparagraph 251(2)(c)(iii) of the Act, Corporation A, which is controlled by W, is related to Corporation B, which is controlled by W and his family.
Accordingly, given that Corporation A is related to Corporation B, which is related to Corporation C, Corporation A is related to Corporation C, pursuant to subparagraph 251(2)(b)(iii) of the Act.
Given that X, Y and Z are specified shareholders of Corporation A, which is related to Corporation C, the sponsoring employer of the DPSP, they are prohibited from becoming beneficiaries of the DPSP by paragraph 147(2)(k.2) of the Act.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We trust that the above comments will be of assistance to you. Please do not hesitate to contact Phillip Kohnen at 957-2093 should you require further information.
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
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