Principal Issues: 1) Where an EPSP member forfeits a previously allocated capital gain, will the CRA administratively allow an adjustment to account for the amount taxed which will never actually be received?
2) If the EPSP re-allocates the forfeited capital gain, is the amount taxable to the member(s) to whom the amount is allocated?
Position: 1) No.
2) Yes
Reasons: 1) The formula in subsection 144(9) of the Act clearly excludes a deduction for a previously allocated capital gain.
2) Upon re-allocation, the forfeited capital gain is taxable under subsection 144(4) of the Act.
2005-016167 XXXXXXXXXX Renée Shields (613) 948-5273 June 12, 2006
Dear XXXXXXXXXX:
Re: Forfeiture of allocated capital gains from an employee profit sharing plan ("EPSP")
This is in response to your letter of November 21, 2005 inquiring about the availability of a deduction for amounts previously taxed as allocations of a capital gain in an EPSP in a situation in which the employee forfeits the right to receive such amounts. You have also asked for our comments on the treatment of a forfeited amount should it be re-allocated among the EPSP members.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
Subsection 144(9) of the Income Tax Act (the "Act") provides a specific deduction provision with respect to forfeitures arising in an EPSP. Amounts determined under this provision are deductible by the individual under paragraph 8(1)(o.1) of the Act. As you have noted, subsection 144(9) carves out forfeitures related to the allocation of capital gains and included in income pursuant to subsection 144(4) of the Act. With such specific wording in subsection 144(9), we are not able to provide any administrative relief.
We note that the tax policy concerns you have expressed with respect to subsection 144(9), and any request for amendments to the Act in this regard should be addressed to the Department of Finance. Should you wish to pursue your concerns further, you may contact the Tax Policy Branch of the Department of Finance by writing to L'Esplanade Laurier, 140 O'Connor Street, Ottawa Ontario K1A 0G5.
With respect to the second part of your inquiry, it is our view that when the Trustee of an EPSP re-allocates the amount(s) forfeited in the above situation, subsection 144(4) of the Act will govern the tax treatment of the amount so re-allocated.
We trust that these comments will be of assistance.
Yours truly,
John Oulton, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch