Principal Issues: [TaxInterpretations translation] Should an employee be taxed on employer contributions to a DPSP?
Position: No, except where subsection 147(10.3) applies.
Reasons: Paragraph 6(1)(a) excludes from the calculation of employment income benefits that result from employer contributions to a DPSP.
XXXXXXXXXX 2011-040543 Michel Lambert CA, M.Fisc.
May 19, 2011
Dear Madam,
Subject: Deferred profit sharing plan
This is in response to your letter of May 4, 2011 in which you asked whether an employee should be taxed on employer contributions to a deferred profit sharing plan ("DPSP").
All legislative references herein are to the provisions of the Income Tax Act.
As stated in paragraph 22 of Circular IC 70-6R5, Advance Income Tax Rulings of May 17, 2002, it is our practice not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices following their review of all facts and documents, which is usually performed as part of an audit engagement.
However, we can offer the following general comments, which we hope will be helpful. These comments may, however, under certain circumstances, not apply to your particular situation.
1. A taxpayer is not required under paragraph 6(1)(a) to include in computing income for a taxation year as income from an office or employment the benefits that arise from the DPSP contributions of the taxpayer’s employer. Consequently, the amount of DPSP contributions that the employer pays to the trustee of the plan for the benefit of one of its employees should not be included in Box 14 of the T4 slip - Statement of Remuneration Paid.
2. However, the following persons are subject to subsection 147(10.3):
- (i) a person related to the employer (footnote 1),
- (ii) a person who is, or is related to, a specified shareholder of the employer or of a corporation related to the employer,
- (iii) where the employer is a partnership, a person related to a member of the partnership, or
- (iv) where the employer is a trust, a person who is, or is related to, a beneficiary under the trust
Subsection 147(10.3) provides that there shall be included in computing the income for a taxation year of such a person the total of amounts allocated or reallocated to the beneficiary in the year in respect of any amount contributed after December 1, 1982 by an employer to, or any forfeited amount under a deferred profit sharing plan or a plan the registration of which has been revoked pursuant to subsection 147(14) or 147(14.1). In the situation where subsection 147(10.3) applies, no amount should be entered in Box 14 of the T4 slip in respect of the amounts referred to in that subsection.
3. As stated in the Employers' Guide – Filing the T4 Slip and Summary (footnote 3), the employer must enter the seven digit DPSP registration number in Box 50.
4. In addition, as stated in that Guide, an employer with a DPSP must enter, in dollars only, the amount of the employee's pension adjustment ("PA") for the year in Box 52.
The employer must leave Box 52 blank if one of the following conditions applies:
- the calculated PA is a negative amount or zero
- the employee died during the year
- the employee, even if still a member of the plan, no longer accrues new pension credits in the year (for example, the employee has accrued the maximum number of years of service in respect of the plan)
Special rules for calculating the pension adjustment apply in certain circumstances to employees who:
- left the service of the employer during the year
- are on, or return from, a leave of absence
- participate in a salary deferral arrangement
- work for the employer part-time
For more information on how to calculate the PA, see the Pension Adjustment Guide (footnote 4). If you need help calculating the PA, consult your DPSP administrator or call our Registered Plans Directorate at 1-800-267-5565 - or 613-954-0930 if you are calling from Ottawa.
As stated in Information Circular 70-6R5, this opinion does not constitute an advance ruling with respect to income tax and does not bind us.
Best regards,
Manager of the Financial Institutions
and Exempt Entities Sector Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Directorate
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 The term "related persons" is defined in subsection 251(2). In that regard, we invite you to consult Interpretation Bulletin IT-419R2, Meaning of "Arm's Length". You can find that bulletin on our website at http://www.cra-arc.gc.ca/E/pub/tp/it419r2/READ-ME.html.
2 The term "specified shareholder" is defined in subsection 248(1). In essence, it is generally a taxpayer who owns, directly or indirectly, not less than 10% of the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation. You can find the complete definition on the Department of Justice website at http://lois-laws.justice.gc.ca/eng/acts/I-3.3/page-450.html#h-151 .
3 CANADA REVENUE AGENCY, RC4120(E) Rev. 10, page 13.
4 CANADA REVENUE AGENCY, T4084(E) Rev. 08