6 April 2000 Income Tax Severed Letter 2000-0017116 - SALARY PAID TO EPSP

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 an employee's total salary be paid to an EPSP? 2) Can an EPSP formula have a maximum amount? Can participation in an EPSP be restricted to certain employees?

Position: 1) Question of fact. 2) Not if employer contributions are computed by reference to profits. 3) Yes.

Reasons: 1) We have never seen a plan that calls for the payment of total salary based on a percentage of profits being paid to an EPSP. 2) The formula under 144(1) states that the % of profits has to be paid to the EPSP; however, more flexibility with "out of profits" formula. 3) The provisions of section 144 allow the employer to restrict participation in an EPSP.

		April 6, 2000

	HEADQUARTERS	HEADQUARTERS
	Rémi Coté	M.P. Sarazin
	Director	824-5441
	CPP/EI Eligibility Division
	Revenue Collections Directorate  

	Attention: Ray Cuthbert	2000-001711

Draft Responses to EPSP Questions

We are writing to you in response to your facsimile of March 28, 2000, wherein you asked us to provide draft replies to the last three questions asked by XXXXXXXXXX in his letter to you dated January 13, 2000.

The questions and draft replies are attached. If you have any questions, please contact Mickey Sarazin at 824-5441.

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate

Question #2

Can an employee's salary be paid through an employee profit sharing plan ("EPSP")?

Answer

The determination of whether a specific arrangement where an employee is paid his or her total salary through an EPSP would satisfy the conditions of section 144 of the Act is a question of fact. This issue can only be dealt with on a case by case basis and only through an application for an advance income tax ruling. For more information concerning advance income tax rulings, please refer to Information Circular 70-6R3 dated December 30, 1996, issued by the Canada Customs and Revenue Agency (available from your local tax services office or on the Internet at the following site: http://www.ccra-adrc.gc.ca/formspubs/menu-e.html).

Question #3

Can an EPSP formula provide for a minimum and a maximum contribution during any year?

Answer

As noted in paragraph 2 of Interpretation Bulletin IT-280R (also available from your local tax services office or on the Internet at the following site:

http://www.ccra-adrc.gc.ca/formspubs/menu-e.html), one of the essential requirements of an EPSP, contained in subsection 144(1) of the Act, is that payments from the employer to the trust must be computed by reference to profits. This means that there has to be a binding obligation by the employer to make payments in accordance with a realistic formula in which profits are the principal variable and the employer has to make these payments in the event of profits. The use of a formula, as contemplated in subsection 144(1) of the Act, will prevent the EPSP from establishing a maximum amount.

However, subsection 144(10) of the Act states that if the arrangement provides that the employer payments are to be made "out of profits" then the employer may elect to have the arrangement deemed to be an arrangement for payments "computed by reference to his profits from his business", provided all the other requirements in subsection 144(1) of the Act are met. Paragraphs 6 to 11 of IT-280R provide the Agency's general views with respect to an employer electing under subsection 144(10) of the Act.

Question #4

Can we confirm that an EPSP does not have to be established for all of an employer's employees?

Answer

An EPSP, as defined in subsection 144(1) of the Act, is an arrangement that allows an employer to share business profits with all or a designated group of employees. Consequently, it is not necessary that all of the employer's employees participate in an EPSP.