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What is an Employee Profit Sharing Plan ?
An Employee Profit Sharing Plan Trust is effective income splitting tax saving strategy for the self employed and commissioned salespeople. It can also save significant employer payroll (CPP & EI) taxes.
Employee Profit Sharing Plans are defined in sec 144 of the income tax act and have been around for quite some time. However, recently the EPSP has gained considerable popularity with the new legislation of sec 120.4 regarding what is commonly referred to as the "kiddie tax" on split income from family trusts.
What is an EPSP ?
The Employee Profit Sharing Plan (EPSP) is an arrangement under which an employer is required to make payments computed by "reference to profits" to an inter-vivos discretionary trust for the benefit of employees of the employer. These payments are deductible to the employer. It is recommended that a subsection 144(1) election be made which provides that the payments are made "out of profits" which will allow greater flexibility to the employer. The beneficiaries of the trust can be all employees of the employer or just a designated group of employees. The payments by the employer to the EPSP must be mandatory but may be as small as $ 100 per employee who is a beneficiary of the EPSP. In order to continue qualifying as an EPSP, the trustee of the EPSP must annually allocate, either contingently or absolutely, all of the EPSP income, capital gains and employer contributions to the employees who are beneficiaries of the EPSP. For example, the funds can be kept in trust for a teenage son and paid out only after he graduates from high school with a GPA average of 3.5. The son would be taxed as if he had received the funds on an annual basis. Thus the strategy can be an excellent tool for saving for advanced education. No source deductions are required either by the employer on the contributions to the trust or by the trust on the allocations to the beneficiaries. These allocations are, however, taxable to the beneficiaries when filing his/her annual tax return. The plan has gained popularity in the recent past as an income splitting vehicle.
The bottom line benefits of this strategy are:
1. The family income tax burden is lowered through income splitting
2. No employee or employer payroll taxes
3. The Trust is not taxed since all profits are allocated to beneficiaries
4. An excellent educational savings plan or employee incentive plan
5. The employer remains in complete control of the trust
Establishing an EPSP
In order to establish an EPSP, documents relating to the establishment of the trust, including a Deed of Settlement for the employees profit sharing plan trust, and all related corporate resolutions should be prepared and executed by the appropriate parties. The trust deed is entered into between the employer and the trustees.
Following execution of documents, a bank account for the EPSP should be opened up either in the name of the Trustee or trustees of the plan or under the name of the plan, and the employer should provide a cheque made payable to the trustees of the EPSP which should be deposited in the bank account of the EPSP.
Maintaining the EPSP
Maintaining the EPSP is relatively simple and involves insuring that profits be paid from the employer to the EPSP during the taxation year or within 120 days thereafter, ensuring that the trustees allocate the amounts received by the EPSP in the calendar year to the beneficiaries of the plan, having the trustees advise the employer as to the amounts which were allocated to the beneficiaries in each particular calendar year so that the employer can complete the necessary reporting requirements, dealing with any changes to beneficiaries of the EPSP, ensuring that the beneficiaries of the EPSP are employees of the employer and keeping proper accounting records of all transactions within the EPSP.
Illustration-payroll tax saving:
ABC Company employs and average of 30 employees with average annual earnings of $ 40,000 before payroll taxes (CPP and EI) . The annual employer share CPP and EI payroll taxes are 81,750.
ABC Company negotiates with its employees that it will pay $ 1000/mo to each employee through payroll with the regular deductions and the remaining amount of their pay through and EPSP trust which will be exempt from payroll taxes. Each employee will therefore have more take home pay and the annual employer share of CPP and EI payroll taxes is reduced to $ 29,606....a savings of $ 52,144 !!
Illustration-income splitting:
The following illustration illustrates the benefits of the EPSP use as an income splitting technique.
Dr Smith is a dentist who resides in British Columbia and has an annual salary at $ 150,000 . Dr Smith has a spouse and two teen-age children. The spouse and children do minor office work. Dr. Smith would like to reduce his tax payments and is considering income splitting with his wife and two children but is concerned about the requirement that they be paid "reasonable" salaries for the minor work they perform..
Tax liability without EPSP:
Taxable income $ 150,000
Taxes payable 59,900
After tax 90,100
Tax liability with EPSP:
If Dr. Smith established and EPSP for his family, his objectives of reducing the family tax burden by splitting taxable income would be met. Profits of the dental practice can be split four ways to minimize the family tax burden. In addition, the contributions would be exempt from payroll taxes for both the employer and his family members. Dr Smith decides to allocate profits as follows:
................. Dr. Smith..... Mrs Smith.... Smith Jr.... Smith Jr2
Taxable income 90,000......30,000......15,000......15,000
Taxes payable 31,745..........5,758.......1,941.....1,948
After tax income 58,256.....24,242.....13,052.....13,052
Family after tax income $ 108,602
CPP and EI savings (approx) 5,000
Total after tax income $ 113,602
Savings with EPSP (113,602-90,100) $ 23,502
For a free analysis of how an EPSP can benefit you please contact:
Blair Goates, CMA
Professional Corporation
1804 Lakemount Blvd
Lethbridge, Ab T1K 3R6
1-866-mytaxes
403-328-8814
Employee Profit Sharing Plans are defined in sec 144 of the income tax act and have been around for quite some time. However, recently the EPSP has gained considerable popularity with the new legislation of sec 120.4 regarding what is commonly referred to as the "kiddie tax" on split income from family trusts.
What is an EPSP ?
The Employee Profit Sharing Plan (EPSP) is an arrangement under which an employer is required to make payments computed by "reference to profits" to an inter-vivos discretionary trust for the benefit of employees of the employer. These payments are deductible to the employer. It is recommended that a subsection 144(1) election be made which provides that the payments are made "out of profits" which will allow greater flexibility to the employer. The beneficiaries of the trust can be all employees of the employer or just a designated group of employees. The payments by the employer to the EPSP must be mandatory but may be as small as $ 100 per employee who is a beneficiary of the EPSP. In order to continue qualifying as an EPSP, the trustee of the EPSP must annually allocate, either contingently or absolutely, all of the EPSP income, capital gains and employer contributions to the employees who are beneficiaries of the EPSP. For example, the funds can be kept in trust for a teenage son and paid out only after he graduates from high school with a GPA average of 3.5. The son would be taxed as if he had received the funds on an annual basis. Thus the strategy can be an excellent tool for saving for advanced education. No source deductions are required either by the employer on the contributions to the trust or by the trust on the allocations to the beneficiaries. These allocations are, however, taxable to the beneficiaries when filing his/her annual tax return. The plan has gained popularity in the recent past as an income splitting vehicle.
The bottom line benefits of this strategy are:
1. The family income tax burden is lowered through income splitting
2. No employee or employer payroll taxes
3. The Trust is not taxed since all profits are allocated to beneficiaries
4. An excellent educational savings plan or employee incentive plan
5. The employer remains in complete control of the trust
Establishing an EPSP
In order to establish an EPSP, documents relating to the establishment of the trust, including a Deed of Settlement for the employees profit sharing plan trust, and all related corporate resolutions should be prepared and executed by the appropriate parties. The trust deed is entered into between the employer and the trustees.
Following execution of documents, a bank account for the EPSP should be opened up either in the name of the Trustee or trustees of the plan or under the name of the plan, and the employer should provide a cheque made payable to the trustees of the EPSP which should be deposited in the bank account of the EPSP.
Maintaining the EPSP
Maintaining the EPSP is relatively simple and involves insuring that profits be paid from the employer to the EPSP during the taxation year or within 120 days thereafter, ensuring that the trustees allocate the amounts received by the EPSP in the calendar year to the beneficiaries of the plan, having the trustees advise the employer as to the amounts which were allocated to the beneficiaries in each particular calendar year so that the employer can complete the necessary reporting requirements, dealing with any changes to beneficiaries of the EPSP, ensuring that the beneficiaries of the EPSP are employees of the employer and keeping proper accounting records of all transactions within the EPSP.
Illustration-payroll tax saving:
ABC Company employs and average of 30 employees with average annual earnings of $ 40,000 before payroll taxes (CPP and EI) . The annual employer share CPP and EI payroll taxes are 81,750.
ABC Company negotiates with its employees that it will pay $ 1000/mo to each employee through payroll with the regular deductions and the remaining amount of their pay through and EPSP trust which will be exempt from payroll taxes. Each employee will therefore have more take home pay and the annual employer share of CPP and EI payroll taxes is reduced to $ 29,606....a savings of $ 52,144 !!
Illustration-income splitting:
The following illustration illustrates the benefits of the EPSP use as an income splitting technique.
Dr Smith is a dentist who resides in British Columbia and has an annual salary at $ 150,000 . Dr Smith has a spouse and two teen-age children. The spouse and children do minor office work. Dr. Smith would like to reduce his tax payments and is considering income splitting with his wife and two children but is concerned about the requirement that they be paid "reasonable" salaries for the minor work they perform..
Tax liability without EPSP:
Taxable income $ 150,000
Taxes payable 59,900
After tax 90,100
Tax liability with EPSP:
If Dr. Smith established and EPSP for his family, his objectives of reducing the family tax burden by splitting taxable income would be met. Profits of the dental practice can be split four ways to minimize the family tax burden. In addition, the contributions would be exempt from payroll taxes for both the employer and his family members. Dr Smith decides to allocate profits as follows:
................. Dr. Smith..... Mrs Smith.... Smith Jr.... Smith Jr2
Taxable income 90,000......30,000......15,000......15,000
Taxes payable 31,745..........5,758.......1,941.....1,948
After tax income 58,256.....24,242.....13,052.....13,052
Family after tax income $ 108,602
CPP and EI savings (approx) 5,000
Total after tax income $ 113,602
Savings with EPSP (113,602-90,100) $ 23,502
For a free analysis of how an EPSP can benefit you please contact:
Blair Goates, CMA
Professional Corporation
1804 Lakemount Blvd
Lethbridge, Ab T1K 3R6
1-866-mytaxes
403-328-8814