Employee Profit Sharing Plans (EPSP’s), Part 2 of 4

This is the 2^nd part of our 4-part blog series on EPSP’s.  This part will talk more about the benefits of EPSP’s and how they can affect your taxes.

Getting back to EPSPs, there have been some benefits to setting one up.  One is that the trust is not taxed.  No tax is payable by a trust governed by an E.P.S.P. on its taxable income. This means that like registered pension plans or R.R.S.P.'s, the income of the trust accumulates on an untaxed basis.  Another benefit is that employees are taxed annually on the activities of the trust.  The allocations are included in the employee’s income in the year of allocation but income tax is not withheld on the transaction.  The employer will deduct the amounts paid to the EPSP within 120 days of the Corporation’s year end.  The EPSP can be used as an opportunity to reward employees and help create loyalty.

Many EPSPs have been a way for small business owners to distribute profit among family members, children and other employees.  However, the original intent behind EPSPs, as a parliament initiative, was to create a way for business owners to align the interests of their employees with those of the business by sharing the profits of their business with their employees.  The intent was to create vehicles for employees to save money through the EPSP that would be invested tax free, allowing the profits plus gains to be distributed on an annual basis to employees.  Since many business owners have simply been using it as a way to get around CPP and EI, there are currently major consultations going on with the department of finance in the way of proposed changes.  If you’d like to see the consultations that closed just recently (October 25, 2011) go to http://www.fin.gc.ca/activty/consult/epsp-rpeb-eng.asp. 

On part 3, we’ll talk about the different scenarios involved when EPSP rules change.