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.