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 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 at 64], 2014 TCC 334
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 | 64 |
| Tax Topics - General Concepts - Sham | purported recipients of trust distributions had no control over funds | 242 |
Administrative Policy
11 February 2019 External T.I. 2018-0738561E5 - Employer contributions
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
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.
20 June 2001 External T.I. 2001-0086505 F - RPEB - MONTANTS PERDUS
After indicating that where the employee forfeits a conditional allocation of shares and remains a beneficiary under the EPSP, s.144(9) will not apply, CCRA stated:
For an arrangement to be an EPSP as defined in subsection 144(1), the arrangement must, among other things, provide that payments to the trust by the employer are to be "computed by reference to … profits" and that the amounts so paid are to be held and invested for the benefit of the employees who participate in the EPSP. … [A] plan that allows amounts forfeited by a beneficiary to be paid to the employer could result in the plan not being an EPSP.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 144 - Subsection 144(9) | s.144(9) inapplicable until employee ceases to be a beneficiary | 42 |
14 November 1996 External T.I. 9635555 - 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 External T.I. 9413065 - 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
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) | 420 |
| 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 | 431 |
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) | 33 |
IT-379 "Employees Profit Sharing Plans - Allocations to Beneficiaries"
Articles
Elizabeth Boyd, Jeremy J. Herbert, "Trusts Holding Shares For Employees", draft 2023 CTF Annual Conference paper
Use of EPSPs for open market share purchases for small amounts “out of profits” (pp. 17-18)
- EPSPs seem to be used quite frequently to facilitate employee share purchase plans to which both the employees (by way of payroll deduction) and employers contribute on the open market.
- When so used, advantages of the EPSP over an EBP trust include that the increase in the shares’ value from their acquisition can be received by the employee as a capital gain (in contrast to employment income under an EBP) and dividends and capital gains generated by the EPSP can retain that character when allocated to an employee – and the employer’s deduction of contributions to an EPSP is more immediate and straightforward (i.e., no need for the trustee to determine the employer’s deduction nor is it offset by income earned in the trust).
- The taxation of participants in the year in which contributions are made to an EPSP (in contrast to an EBP trust whose participants are not taxable regarding contributions to or earnings of the trust until they receive a distribution, assuming there is no SDA) means that EPSPs will usually be most useful in connection with employee share plans under which the contributions are relatively small.
- Most EPSP employee share purchase plans seem to be “out of profit” EPSPs under which the employer can base contributions on a percentage of employee earnings or a dollar amount.
Subsection 144(4)
Articles
Elizabeth Boyd, Jeremy J. Herbert, "Trusts Holding Shares For Employees", draft 2023 CTF Annual Conference paper
Flow-through advantage of EPSP (p. 16)
- Unlike employee benefit plans (EBPs), EPSPs are permitted (under ss. 144(4) and (8)) to flow-out capital gains and dividends to participants, and are not required to withhold on contributions or allocations (2013-0480911E5).
Subsection 144(7) - Beneficiary’s receipts that are not deductible
Administrative Policy
27 October 1995 External T.I. 9516265 - EPSP - NON-RESIDENT BENEFICIARIES
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 144 - Subsection 144(8) | 27 | |
| Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) | 27 |
Subsection 144(7.1)
Articles
Elizabeth Boyd, Jeremy J. Herbert, "Trusts Holding Shares For Employees", draft 2023 CTF Annual Conference paper
Non-taxable distribution contrasts with EBP (p. 16)
- In the case of an EPSP used to acquire employer shares, s. 144(7.1) permits it to distribute shares to an employee on non-taxable basis at the employee’s cost base reflecting taxable allocations to the employee under the EPSP and the employee’s own contributions to which the shares can be attributed. This contrasts with distributions to an employee from an EBP trust, which is fully taxable and creates an FMV cost base in the distributed shares.
Subsection 144(8) - Allocation of credit for dividends
Administrative Policy
27 October 1995 External T.I. 9516265 - EPSP - NON-RESIDENT BENEFICIARIES
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 144 - Subsection 144(7) | 44 | |
| Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) | 27 |
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) | 25 |
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
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 | 153 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(11) | no s. 20(11) deduction for foreign taxes respecting EPSP income allocated to beneficiary | 107 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) | no s. 20(12) deduction to EPSP beneficiary | 108 |
Subsection 144(9)
Administrative Policy
20 June 2001 External T.I. 2001-0086505 F - RPEB - MONTANTS PERDUS
CCRA indicated that where the employee forfeits a conditional allocation of shares and remains a beneficiary under the EPSP, s.144(9) will not apply – but will apply in respect of such forfeited allocation when the individual ceases to be a beneficiary.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 144 - Subsection 144(1) - Employee Profit Sharing Plan | payment to the employer of amounts forfeited by the employee could deny EPSP status | 112 |
Articles
Elizabeth Boyd, Jeremy J. Herbert, "Trusts Holding Shares For Employees", draft 2023 CTF Annual Conference paper
Implications and handling of EPSP forfeited amounts (p. 17)
- By containing specific provisions permitting an EPSP participant to deduct forfeited amounts (i.e., which fail to vest), s. 144(9) implies that employee entitlements under an EPSP may be subject to vesting conditions.
- Forfeitures must be reallocated within an EPSP to other participants, rather than being paid out to the employer while the plan is operational - but forfeitures can be used to offset the balance of the employer’s contribution obligation.
Subsection 144(10) - Payments out of profits
Administrative Policy
19 November 1996 External T.I. 9637345 - 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.