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. MNR, 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
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).
Administrative Policy
11 March 2014 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.
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 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
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.
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.
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 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.