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.  

Canadians Buying & Selling Real Estate in the U.S.

Many people ask whether it is wise to buy Real Estate in the U.S. and there really is no straight answer to this question.  We’ve seen people buy and sell real estate in the U.S. recently and lose their shirt, while we’ve seen other people make a small fortune recently in U.S. real estate.  Just like in Canada there are many factors that affect the success of real estate transactions such as location, purchasing with a margin of safety, ensuring a thorough home inspection, having someone to take care of the property and the list goes on.  The real key in any real estate transaction is that you have to realize that you really make the return when you buy, not sell.  Buying the right property in the right location at the right time is really key!  Another question asked is whether people should buy the U.S. property personally or through a Corporation.  This question is different for each individual as everyone has a different situation when it comes to tax, liability and estate.  Keep in mind that the U.S. estate tax, which has been proposed to change recently can be a factor in making your real estate investment decision.  When buying, renting or selling properties in the U.S., you should know the basics on tax.  If you have income from property in the U.S. during a calendar year you must file a U.S. tax return.  If you do not have income from your U.S. property then you do not have to file a U.S. tax return.  You do not have to file an income tax return in the U.S. when you purchase U.S. property, however you must file one if you sell a U.S. property.  As mentioned in my prior blog when you sell a U.S. property they will take a withholding tax (typically 10-20%) on the gross proceeds of the sale.  To get this withholding tax back you must file a U.S. tax return and claim the U.S. tax paid as a credit on your Canadian tax return.  There are many considerations when dealing in the U.S. so please don’t hesitate to contact us for any questions.  We have a lot of knowledge and work closely with specialists in these areas.