Section 144

Subsection 144(1) - Definitions

Articles

Jack Bernstein, "Employee Profit Sharing Plans", Tax Profile, Vol. 5, No. 23, July 1998, p. 265.

Employee Profit Sharing Plan

Cases

Gary Jackson Professional Corporation v. Canada (National Revenue), 2013 DTC 5108 [at 6082], 2013 FCA 142

The Minister assessed the taxpayer for CPP contributions on income from its trusteeship of an employee profits sharing plan. The trustees' compensation under the plan was to be one of two options, in the discretion of the employer: either $100 per participating beneficiary, or a formula to be set by the employer's directors (which they never did). The compensation was also to be a minimum of 1% of profits.

Webb JA found that these terms did not amount to payments computed by reference to the employer's profits. The amounts the trustees actually received were essentially arbitrary, being within the discretion of the employer.

Since no election had been filed under s. 144(10), the payments had to be payments that the appellant was required to make and that were computed with reference to profits (para. 17). Notwithstanding the 1% minimum, it could not be said that the payments the trustees received were required to be made. The Minister's decision to charge CPP contributions was therefore correct.

See Also

Dimane Enterprises Ltd. v. The Queen, 2015 DTC 1013 [at 64], 2014 TCC 334

purported recipients of trust distributions had no control over funds

The taxpayer's sole director ("Richard"), who ran the taxpayer's business out of his home office, employed his four children, aged 23, 21, 14 and 13, for annual salaries of $1200 each (or $600 for the two younger children) to perform tasks such as maintaining the lawn or sorting mail. The taxpayer set up an "employee profit-sharing plan" with Richard and his wife as trustees, with a "committee" of the taxpayer (i.e., Richard) to determine the taxpayer's contributions to the plan and the participants, and with distributions to the participants determined by the trustees (i.e., Richard). The taxpayer elected under s. 144(10).

D'Arcy J found that the taxpayer could not deduct its contributions to the plan, as the plan was a sham. What in fact occurred was that the purported distributions out of the fund were to a bank account controlled by Richard, so that the participants "never had control of these funds" (para. 40), and so that the "real transactions" were "the payment of amounts by the Appellant to Richard" (para. 42). Moreover, the small portion of the funds received out of the "EPSP" which were applied to expenses represented payment simply of "family expenses that a father and mother incur for their children" (para. 41).

Although these findings were sufficient grounds for "sham," he went on to note that the children did not make any contribution to the taxpayer's profits, as the chores performed were services for their parents, not the taxpayer (para. 45).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt payments not received where children "recipients" had no control over funds 58
Tax Topics - General Concepts - Sham purported recipients of trust distributions had no control over funds 236

Administrative Policy

11 February 2019 External T.I. 2018-0738561E5 - Employer contributions

requirement for employer profit contributions to an EPSP cannot be waived

Following a corporate restructuring, an employer “closed” its employees profit sharing plan (EPSP) and has not contributed to the plan since January 1, 2017. However, the plan continues to be administered as if it were a valid EPSP. Can the minimum contribution requirement set out in IT-280R, para. 6 be waived? In responding “no,” CRA referenced the requirement in para. (a) and stated:

This means that there must be a binding obligation on the employer to make contributions pursuant to the plan’s contribution formula, and that such contributions must actually be made in the event of profits. If the terms of a valid EPSP were subsequently amended to remove the employer’s obligation to make contributions, the arrangement would no longer meet this requirement … . The CRA has no authority to waive this requirement.

…[Whether] the arrangement continues as a salary deferral arrangement, retirement compensation arrangement or an employee benefit plan … is a question of fact … .

11 March 2014 External T.I. 2013-0503771E5 - EPSP

no contribution for deceased employee

Can an employer can make payments into an EPSP after the death of an employee? After noting that "the payments made by the employer are required to be made for the benefit of employees of the employer," CRA stated:

Accordingly, an employer cannot make payments into an EPSP for the benefit of deceased or former employees.

14 November 1996 T.I. 963555 (C.T.O. "EPSP Expenses Reducing Employer Contributions")

A plan established to borrow funds and to invest those funds in the employer's shares likely would not qualify as an EPSP because the employer contributions would not be intended to represent any profit sharing but, rather, the amount to be contributed by the employer would be equal to the interest expense incurred by the plan trust for its borrowings.

24 June 1994 T.I. 941306 (C.T.O. "Forfeitures Under EPSP")

Forfeitures may be used to reduce the excess of employer contributions otherwise payable over the minimum level of employer contributions required by RC; however, forfeitures may not be used to pay expenses unless they are first allocated to employees.

19 August 1992 External T.I. 5-922039 -

Where there is a specific provision in the plan to the effect that the employer payments are to be made "out of profits", it will not be required that the employer make a minimum contribution.

Subsection 144(3) - Allocation contingent or absolute taxable

Administrative Policy

6 February 2019 Internal T.I. 2018-0762101I7 - Ruling request - DSU plan and EPSP

proposed use of EPSP trust to produce equivalent of CCPC stock option plan was abusive

Employees of Employerco and related corporations have been issued share appreciation right (SAR) units, which entitle such Participants to a lump sum on retirement, termination of employment, or death (“Retirement”) equalling the increase, from the date of issuance to the redemption date of redemption, in the closing price of a listed share of Employerco.

Proposed Transactions

Participants would be offered a one-time election to convert their SAR units under this Plan into deferred share units (DSUs), having an equivalent value (so that there would be a smaller number of DSUs). The DSUs would be paid upon Retirement through a distribution of Shares from a newly-formed employee’s profit sharing plan (EPSP) trust. Employerco would make an “out of profits” election under s. 144(10).

The EPSP Trust would use a “Loan” from Employerco on arm’s length terms to purchase Shares on the exchange equal to the number of outstanding DSUs under the Plan and received “Additional Loans” from Employerco to acquire additional Shares in connection with the additional DSUs issued from time to time as dividend equivalents.

The EPSP Trustee would use the cash proceeds it receives from dividends on the Shares, together with “Basic Annual Contributions” (by Employerco to a maximum of 1% of its profits), and Deficiency-Makeup Contributions from Employerco to pay the Loan interest each year. The Participant will have no s. 144(3) income inclusion in the year because there is no net amount for the EPSP Trustee to allocate to the Participant, i.e., the EPSP Trust’s interest expense fully offsets the EPSP Trust’s allocable receipts (i.e., the dividend income, the Basic Annual Contribution, and the Deficiency-Makeup Contribution).

Upon a Participant’s Retirement, Employerco would make a Balloon Contribution (deducted by it under s. 144(5)) to enable the EPSP Trustee to repay the portion of the Loans relating to the Participant’s DSUs, with such amount being allocated to the Participant for inclusion under s. 144(3). The EPSP Trust would then distribute Shares to the Participant in full satisfaction of the Participant’s rights under the Plan.

S. 144(7)(b) would then exclude that amount from the Participant’s income and, under s. 144(7.1)(b)(iv), that amount would be the Participant’s Share cost. Thus, any gain accrued during the time the Shares were held by the EPSP Trust would not be realized until the Shares are ultimately sold by the Participant.

Disposition on conversion and abusive tax avoidance

CRA found that this plan “failed on technical grounds,” i.e., the conversion of the units from SARs to DSUs and addition of dividend equivalents would trigger an immediate income inclusion, but then went on to indicate that even if this structure were instead implemented on a prospective basis, it would refer it to the GAAR Committee, stating:

[T]he structure is highly artificial, provides significant tax deferral and rate reduction benefits on employment compensation, and represents an abuse of the EPSP rules. Here, there is no profit-sharing in purpose or effect. …

Furthermore … the favourable tax results … are similar … to those available under the employee stock option rules … . even though … the requirements of paragraph 110(d) or (d.1) are not satisfied.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 6801 - Paragraph 6801(d) conversion of SARs to DSUs triggered immediate inclusion under s. 6(1)(a) or 6(11) 402
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) use of EPSP trust to synthetically create the equivalent of a s. 110(1)(d.1) stock option plan would be a s. 245(4) abuse 419

13 January 1993 T.I, (Tax Window, No. 28, p. 17, ¶2384)

The employee's entitlements under a profit sharing plan are taxable at the time they are allocated to the employee by the trustee. Accordingly, where the employee is bankrupt, the amount reported in the pre-bankruptcy, in-bankruptcy or post-bankruptcy returns will depend on when the trustee made the allocation to the employee.

9 April 1992 T.I. (Tax Window, No. 18, p. 9, ¶1856)

An allocation to a non-resident under an EPSP that relates to duties performed in Canada is required to be included in his income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 144 - Subsection 144(8) 31

IT-379 "Employees Profit Sharing Plans - Allocations to Beneficiaries"

Subsection 144(7) - Beneficiary’s receipts that are not deductible

Administrative Policy

October 1995 Memorandum 951626

Where an employee beneficiary of an EPSP has become a non-resident of Canada, allocations not required to be included in the non-resident's taxable income will be subject to tax under s. 144(7)(b) if they are received upon the non-resident's return to Canada.

Subsection 144(8) - Allocation of credit for dividends

Administrative Policy

October 1995 Memorandum 951626

The deemed receipt of dividends under s. 144(8) does not cause such amounts to be paid or credited for purposes of Part XIII of the Act.

9 April 1992 T.I. (Tax Window, No. 18, p. 9, ¶1856)

The deeming provisions of ss.144(8) and (8.2) do not result in a requirement to withhold Part XIII tax because the amounts are not considered to be "paid or credited" to the non-resident.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 144 - Subsection 144(3) 23

Subsection 144(8.1)

Paragraph 144(8.1)(b)

Administrative Policy

31 January 2018 External T.I. 2016-0676431E5 - foreign tax credit on employees profit sharing

15% limitation on FTC credit

Are foreign taxes allocated from an employees profit sharing plan to an individual on a T4PS limited to 15% for foreign tax credit purposes? CRA responded:

Due to the expression “except such portion that is deductible by the EPSP under subsection 20(11) of the Act … as it appears in paragraph 144(8.1)(b) … an employee beneficiary of an EPSP is, effectively, restricted to a foreign tax credit of no more than 15% of the foreign non-business income (other than income from real or immovable property) allocated to them by the EPSP.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(1) $200 basket for NBIT for which country-by-country reporting is not required includes flow-through EPSP taxes 145
Tax Topics - Income Tax Act - Section 20 - Subsection 20(11) no s. 20(11) deduction for foreign taxes respecting EPSP income allocated to beneficiary 101
Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) no s. 20(12) deduction to EPSP beneficiary 102

Subsection 144(10) - Payments out of profits

Administrative Policy

19 November 1996 T.I. 963734 (C.T.O. "Retroactive 144(10) Election")

An election under s. 144(10) cannot be filed with effect for previous taxation years.

2 March 1992 External T.I. 5-912899 -

An election under s. 144(10) is necessary where a plan specifies payments to be made "out of profits". The profits of a non-arm's length corporation cannot be taken into account unless that corporation was also a participating employer. Where payments were to be computed by reference to profits, the formula had to be expressed as a percentage of profits for the year at a minimum percentage of at least 1% ought to be specified.

IT-280R "Employees Profit Sharing Plans - Payments Computed by Reference to Profits"