Employees profit sharing plans (EPSPs)

  1. What are the current rules in respect of EPSPs?
  2. What are the changes proposed by the budget in respect of EPSPs?
  3. When will these new changes apply?
  4. What is an excess EPSP amount?
  5. How is the tax on the excess EPSP amount calculated?
  6. As the amounts allocated from an EPSP are included in my income, will I be taxed twice on this amount?
  7. Is there a situation where this tax could be waived or canceled?
  8. Are these changes applicable to employees who are not specified employees?
  9. Where can I get more information about these changes?

An EPSP is an arrangement that allows an employer to share profits with all, or a designated group of employees. To ensure that EPSPs are used for their intended purposes, the budget proposes a measure to discourage excessive employer contributions to an EPSP in respect of a specified employee. Specified employees are employees who have a significant equity interest in their employer or who does not deal at arm's length with their employer.

Q1. What are the current rules in respect of EPSPs?

A1. An employer may make tax-deductible contributions to an EPSP. The trustee of the EPSP is required to allocate to beneficiaries each year all employer contributions, profits from trust property, capital gains and losses, and certain amount in respect of forfeitures. These EPSP allocations, with certain exceptions, are included in computing the income of the beneficiaries for the taxation year in which they are allocated.

Once amounts are allocated, payments are made by the trustee to the beneficiaries in accordance with the terms of the EPSP (for example, immediately, after a minimum vesting period, or on retirement or termination). Because the allocations are taxable, payments out of the trust are generally not subject to tax when received by the beneficiaries.

Currently, an employer may make contributions to an EPSP in respect of a specified employee, without any limitation in regard to the amount of the contributions.

Q2. What are the changes proposed by the budget in respect of EPSPs?

A2. When the employer contribution (amount paid) allocated in respect of a specified employee exceeds a certain threshold, referred to as an excess EPSP amount, the budget proposes a new tax payable by the employee on the excess amount.

Q3. When will these new changes apply?

A3. These changes will apply to employer contributions made after March 28, 2012.

However, these changes will not apply to amounts paid before 2013 to an EPSP pursuant to a legal obligation arising under a written agreement or arrangement entered into before March 29, 2012.

Q4. What is an excess EPSP amount?

A4. An excess EPSP amount of a specified employee for a taxation year in respect of an employer is determined as follows:

Determination if there is an excess EPSP amount
All amounts paid by the employer or by a non-arm's length corporation to the EPSP that are allocated for the year to the specified employee   A
Less: 20% of the specified employee's total income for the year (excluding EPSP allocations, stock option benefits and deductions in computing income from an office or employment) - B
Excess EPSP amount
(Line A minus Line B, if the amount is negative, enter "0")
= C

Q5. How is the tax on the excess EPSP amount calculated?

A5. The tax on the excess EPSP amount is calculated as follows:

Calculation of the tax on the excess EPSP amount
The total of all excess EPSP amounts of the specified employee for the year         A
Multiplied by the following rates          
Federal marginal tax rate   29% B    
Where, at the end of the year, the specified employee:
  • is resident in the province of Quebec, enter 0%; 
  • is resident in a province other than Quebec, enter the highest personal income tax rate that applies for the year to a resident of that province; or
  • in any other case, enter 14%.
+ % C    
Total rate (Line B + Line C) = % % D
Tax on excess EPSP amount (Line A multiplied by Line D)          

Q6. As the amounts allocated from an EPSP are included in my income, will I be taxed twice on this amount?

A6. No. A new deduction will be introduced to ensure that an excess EPSP amount is not also subject to regular income tax.

A specified employee will, however, not be able to claim any other deductions or credits in respect of an excess EPSP amount.

Q7. Is there a situation where this tax could be waived or canceled?

A7. Yes. The Minister of National Revenue will have the authority to waive or cancel the tax on these excess EPSP amount if the Minister considers that it is just and equitable to do so, having regard to all the circumstances. In such cases, the normal rules will apply.

Q8. Are these changes applicable to employees who are not specified employees?

A8. No., theses changes have implications only for specified employees.

Q9. Where can I get more information about these changes?

A9. The CRA is committed to providing taxpayers with up-to-date information. The CRA encourages taxpayers to check its Web pages often. All new forms, policies, and guidelines will be posted as they become available.

In the meantime, please consult the Department of Finance Canada's Budget 2012 documents for details.