“EPSP’s do not work in all situations.”
There have been a number of recent publications stating that Employees Profit Sharing Plans (“EPSP’s”) are a good way to avoid paying Canada Pension Plan payments relating to salaries.
Section 144 of the Income Tax Act states that the payments to an EPSP must be computed by reference to an employer’s profits from the employer’s business. As well, the trustee is required to annually allocate the contributions received to the beneficiaries of the trust. The CRA has recently reviewed a number of EPSP’s and has raised some concerns.
There are a number of situations where the only beneficiary of the trust is the shareholder/manager of the company. The CRA is challenging these situations. The CRA’s view is that these plans are improperly administered for reasons such as those listed below:
- The CRA does not consider an EPSP established for a sole beneficiary a valid plan because the term “Employees Profit Sharing Plan” (as defined in section 144) is in the plural. Therefore, the CRA believes that there needs to be more than one employee.
- In some cases, the shareholder/manager is receiving no wages, but is instead receiving a single payment into the EPSP. The CRA’s view is that the EPSP is established for employees, and employees are expected to receive remuneration/wages. Where the shareholder/manager is not taking wages, then the CRA takes the position that the shareholder/manager is receiving the funds into the EPSP in the capacity as a shareholder as opposed to an employee. Only payments for employees can be paid into an EPSP.
- The CRA expects that the salaries and wages paid to employees will be reasonable. The CRA defines reasonable as what an arm’s length employee would have reasonably expected to be paid for those services. Where a shareholder/manager receives a large one-time payment, the CRA is challenging the reasonability of these payments. This is in conflict with their general policy of allowing large salary/bonus payments to an active shareholder/manager.
Based on the above comments, the CRA is reassessing corporations for CPP and related interest.
This appears to be a “project” that the CRA has undertaken. Careful review should be made of all EPSP’s to ensure that they meet the necessary tests.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.