Principal Issues: [TaxInterpretations translation] Can a profit sharing plan be registered as a DPSP when the corporation has an accumulated deficit?
Position: Yes
Reasons: Section 147 does not require the corporation to have retained earnings to be approved as a profit-sharing plan.
XXXXXXXXXX 2004-010492 Michel Lambert
January 20, 2005
Dear Sir,
Subject: Deferred Profit Sharing Plan (DPSP)
This is in response to your letter of November 22, 2004 in which you asked whether a DPSP can be created where a corporation has accumulated deficits.
You gave us the following example. A corporation that operates a business has capital of $20 million and an accumulated deficit of $10 million, resulting in shareholders' equity of $10 million.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is our practice not to issue written opinions on proposed transactions otherwise than by way of 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 as a result of 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 that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
Subsection 147(1) defines a DPSP as a profit sharing plan accepted by the Minister for registration for the purposes of the Act, on application therefor in prescribed manner by a trustee under the plan and an employer of employees who are beneficiaries under the plan, as complying with the requirements of section 147.
Subsection 147(1) defines a profit sharing plan as an arrangement under which payments computed by reference to an employer’s profits from the employer’s business, or by reference to those profits and the profits, if any, from the business of a corporation with which the employer does not deal at arm’s length, are or have been made by the employer to a trustee in trust for the benefit of employees or former employees of that employer.
Section 147 does not prevent a taxpayer with an accumulated deficit from applying to register a profit-sharing plan as a DPSP. However, the taxpayer must satisfy all the conditions for registration.
As stated in paragraph 3 of Information Circular 77-1R4 of December 30, 1992, the amounts to be paid by the employer are normally computed by reference to profits (e.g. 5% of the profits) as defined in the plan. They may be computed in another way, provided that the amounts come from profits. The payments made by the employer must be made to a trustee in trust for the benefit of the employees or former employees of the employer, as provided under subsection 147(1).
As stated in Information Circular 70-6R5, this opinion is not an advance income tax ruling and is not binding.
Best regards,
Section Manager
for the Director of the Directorate
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch