8 November 2004 Internal T.I. 2004-0093441I7 - DPSP - Contributions Based on US Parent's Profits

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: Where an employer's contributions are to be computed with reference to its profits and that of its U.S. parent, and the employer has no profits, can an employer make a contribution to a DPSP based on its U.S. parent's profits?

Position: Yes, provided the corporations are not dealing at arm's length and the contributions are made in accordance with the terms of the plan.

Reasons: An employer whose contributions are determined by reference to profits can base such contributions on its own profits for the year or on the combined profits for the year of it and corporations with which it does not deal at arm's length. In this scenario, the U.S. parent controls the employer and therefore does not deal at arm's length with the employer pursuant to subsection 251(1) and subparagraph 251(2)(b)(i) of the Act. In a situation involving combined profits where the employer's own profits are nil, an employer could end up basing its contributions solely on the profits of the parent.

						November 8, 2004

	HEADQUARTERS	HEADQUARTERS
	Registered Plans Directorate	Income Tax Rulings
			  Directorate
	Attention:  Betty Bertrand	C. Lalonde
			948-2226

			2004-009344

Deferred Profit Sharing Plan (DPSP) - Contributions Based on U.S. Parent's Profits

This is in response to your electronic message of September 2, 2004 requesting our views on a situation where, as provided for in the DPSP, a Canadian company (the "Employer") bases its contributions to a DPSP on its own profits in combination with the profits of its U.S. parent. In a specific situation where its own profits are nil, you question whether the profits of the U.S. parent can be used as the basis for calculating its contributions to a DPSP under section 147 of the Income Tax Act (the "Act").

Our Comments

A DPSP involves an arrangement where an employer may share with either all or a designated group of employees of the employer the profits from the employer's business, or from the business of the employer and one or more corporations with which the employer does not deal at arm's length.

A plan that is submitted for registration under the DPSP rules, must stipulate that no contributions can be made to the plan other than the employer's contribution made according to the terms of the plan for the benefit of the employer's employees who are beneficiaries under the plan, or an amount transferred to the plan in accordance with subsection 147(19).

A plan may provide that the employer can make contributions "by reference to profits" or "out of profits". If "by reference to profits", the contribution is expressed as a percentage of profits for the year. An employer whose contributions are determined by reference to profits can base such contributions on its own profits for the year or on the combined profits for the year of it and corporations with which it does not deal at arm's length. An employer, however, can only contribute to a plan on behalf of its own employees.

In determining whether an employer and one or more corporations are dealing at arm's length, subsection 251(1) of the Act provides that related persons, which includes corporations, are deemed not to deal at arm's length and it is a question of fact whether persons not related to each other are dealing at arm's length. Paragraphs 251(2)(b) and (c) set out the rules for determining when a corporation and another person will be considered to be "related persons" for purposes of the Act.

You have indicated that the Employer is controlled by its parent company which is located in the U.S. Where one corporation is controlled by another corporation, subparagraph 251(2)(b)(i) of the Act provides that these two corporations are persons related to each other. As a result, they are deemed not to deal at arm's length by virtue of paragraph 251(1)(a) of the Act. Further, the fact that the parent is located in the U.S. is inconsequential for the purposes of the definition of "profit sharing plan" in subsection 147(1) of the Act.

Consequently, when the Employer is computing its contributions by reference to its profits and that of its parent in accordance with the terms of the DPSP, in our view, the Employer could base its contributions solely on the U.S. parent's profits if its own profits are nil.

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch