Employee Profit Sharing Plans (EPSP’s), Part 4 of 4

This is the last part of our EPSP blog series where we will discuss the remaining items on the summary of consultations. 

3. Limitations on contributions

Under the Income Tax Act, employers may deduct expenses and outlays only to the extent that they are reasonable in the circumstances. The Income Tax Act also includes specific limits to employer contributions to certain plans. For example, consistent with limits on other retirement savings vehicles, employer contributions to a Deferred Profit Sharing Plan may not exceed the lesser of 18 per cent of an employee’s compensation, or one-half of the money purchase Retirement Pension Plan limit (for 2011, one-half of the money purchase limit is $11,485).

While studies have indicated that a profit pool between 3 and 5 per cent of salaries/wages is sufficient to positively influence the behavior of employees, the Income Tax Act does not place a specific limit on the size of EPSP employer contributions ^[2]. This could change under the new provisions.

Is there a specific rationale for allowing unlimited EPSP employer contributions?

What would be the impact on your business or clients if employer contributions to an EPSP were subject to a specified limit, such as a certain percentage of an employee’s salary or wages paid directly by the employer for the year? What would be an appropriate limit?

4. Withholding Requirements

The Income Tax Act imposes withholding requirements on several sources of income and includes tax by installment rules. EPSP allocations are not subject to the same income tax withholding requirements as salary and wages paid directly by the employer, and can be structured to avoid tax by installment rules. This can allow related persons to delay the payment of income taxes.

As EPSP contributions are allocated directly from the trust rather than the employer, they are also not subject to EI and CPP withholding requirements. This could change with the revision.

What would be the impact on your business or clients if EPSPs became subject to income tax withholding requirements similar to those applying to salary or wages paid directly by the employer for the year? What would be the effect of this change if EPSP allocations were also considered employment income paid by the employer for EI and CPP purposes (and, therefore, subject to EI and CPP withholdings)?

5. Additional Questions

In the context of reviewing EPSP rules, are there additional aspects of EPSPs that you think should be reviewed, or taken into consideration, to ensure that EPSPs remain an effective compensation tool? Are there any technical improvements that could be proposed as part of the review of EPSP rules?

Currently, while we wait, it may not be good to set up an EPSP where the rules are going to change.  It is best to know all the current rules before getting into something such as an EPSP.  EPSPs can still be used for the purpose designed by the government, but should not be used as a way to avoid CPP and/or EI.  There are other ways to achieve this goal that are much more efficient and are not being looked at to be changed by parliament!  Don’t hesitate to contact us at Kustom Design to consult further on this topic.  

Employee Profit Sharing Plans (EPSP’s), Part 3 of 4

Here is the 3^rd part of our EPSP blog series.  In this 3^rd part, we focus on the consultations made in connection with some proposals to change EPSP rules.

If the rules change as we think they may, this could really put a damper on this loophole for many business owners.  Here is the summary of the consultation that was published.

1. Eligibility to participate in an EPSP

The Income Tax Act contains provisions that limit the ability of employees who do not deal at arm’s length with their employer to enter into certain compensation arrangements with their employer. For example:

• To be accepted for registration, a deferred profit sharing plan must exclude persons related to the employer and specified shareholders from participating in the plan; and
• To qualify for a deduction, employees who exercise stock options must deal at arm’s length with the employer.

With the proposed changes, EPSP provisions may include similar restrictions on the participation of employees.

Is there a specific rationale for allowing non-arm’s length employees to participate in an EPSP?

What would be the impact on your business or clients if employees who do not deal at arm’s length with the employer, such as related persons, were excluded as eligible EPSP beneficiaries?

2. Role of Minor Children

The Income Tax Act contains provisions to limit income-splitting techniques that seek to shift certain types of income (e.g., certain capital gains, taxable dividends, income from partnerships) from a higher-income individual to a lower-income minor. Under the tax on split income provisions, for example, income received by minor children is taxed at the highest federal marginal income tax rate (29 per cent). In Budget 2011, the Government extended the tax on split income to certain capital gains on shares of most unlisted corporations. EPSP allocations are not subject to these provisions currently, however the revision could change this.

Is there a specific rationale for excluding EPSP allocations from the tax on split income provisions?

What would be the impact on your business or clients if EPSP allocations to minor children were subject to the tax on split income?

There are 3 items left on the summary of the consultation – Limitations on contributions, Withholding Requirements and Additional Questions.  We will take a look at these on the next part of this series. 

Amending the Excise Tax Act part 2

The Minister of Finance Jim Flaherty insisted recently that the government was not imposing any new tax, he, however, noted: "The proposed changes contained in the Notice of Ways and Means Motion tabled in the House of Commons on March 22, 2010 are designed to confirm our long-standing policy intent to restore the situation that existed prior to the court decisions. We are not imposing new taxes." This is because changes to the Income Tax Act are put into existence before they are passed as law. When will the continuous growth of the tax burden on the people stop? Not until the current fiat financial system that is built on the backs’ of the people crashes. The more Canada goes into deficit over the next years, the more taxes that will be collected, or become collectible on the Government’s Balance Sheet. The more the debt, the more the interest, the more the taxes!