| 39108/18 | |
| 24(1) | 5-912899 |
| P. Spice | |
| (613) 957-8953 |
Attention: 19(1)
March 2, 1992
Dear Sirs:
Re: Interpretation of Section 144 of the Income Tax Act (the "Act")
We are writing in reply to your letter of October 15, 1991, in which you ask for our opinion on the application of the above noted provision to particular fact situations.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where the particular transactions are completed, the enquiry should be addressed to the relevant District Taxation Office. The following comments are, therefore, of a general nature only, and are not binding on the Department.
Subsection 144(10) of the Act permits an employer who participates in an employees profit sharing plan (EPSP) to elect that payments out of profits be deemed to be payments "computed by reference to his profits from his business". This election is necessary where a plan specifies that payments will be made "out of profits", since subsection 144(1) of the Act requires that to qualify as an EPSP payments under the plan must be "computed by reference to profits".
Such an election can only be made by a participating employer and, therefore, the profits of a non-arm's length corporation cannot be taken into account unless that related corporation is also a participating employer. If the participating employers have no profit for the year and no retained earnings, no payment can be made under the plan even where a related but non- participating employer has profits.
Where the plan specifies that payments are to be computed by reference to profits, it is the Department's position that the formula must be expressed as a percentage of profits for the year and that a minimum percentage of at least 1% be specified. Please see the commentary in paragraphs 56 and 19 of Information Circular 77-1R3 ("Profit Sharing Plans").
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate