In the Fall 2010 issue of Tax Alert, we provided an overview of employee profit sharing plans (EPSPs), including several primary advantages typically associated with these plans. These benefits included the possible reduction or elimination of Canada Pension Plan (CPP) and Employment Insurance (EI) premiums, and significant tax deferral opportunities.
In Budget 2011, the Federal Government announced its intention to review the existing rules to determine if technical amendments were required, and also noted that it would consult with stakeholders prior to proceeding with any proposals. In this regard, on August 30, 2011 the Department of Finance issued a press release inviting comments on the various tax rules for EPSPs.
Within the release, the Department of Finance reiterated concerns noted in Budget 2011, stating:
In recent years, these plans have increasingly been used as a means for some business owners to direct profit participation to members of their families with the intent of reducing or deferring taxes on these profits. Some employers are also using EPSPs to avoid making Canada Pension Plan contributions and to avoid paying Employment Insurance premiums on employee compensation...
Several questions were also put forward to relevant stakeholders, some of which included:
- Is there specific rationale for allowing non-arm's length employees to participate in an EPSP?
- Is there specific rationale for excluding EPSP allocations from the tax on split income provisions?
- Is there specific rationale for allowing unlimited EPSP employer contributions?
- What would be the impact to a business or its 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)?
It is difficult to forecast what specific proposals and implementation dates, if any, will result from these consultations. It is clear, however, that the Department of Finance is concerned with the advantages presently associated with the typical EPSP strategy.
Stay tuned for additional Tax Alerts as more news becomes available, or contact your Collins Barrow advisor for more information.
Jason Melo, CA, CPA, CFP, is a Senior Tax Manager in the Leamington office of Collins Barrow.
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