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Employees Profit Sharing Plan Trusts ("EPSPs") – Department of Finance Consultation Review

Subject: EPSPs Number: 11-21 Date: 9/23/2011

the Department wishes to eliminate any mischief with the use of EPSPs

We last discussed EPSPs in Tax Tip 05-23 where we indicated that EPSPs were often used to avoid paying Canada Pension Plan payments related to salaries.  Over the years, EPSPs have also been used to income split with family members of the shareholders of owner-managed private corporations and obtain significant tax deferrals for such corporations (especially in the first year of implementation of the EPSP). 

On August 30, 2011, as a follow-up to an announcement made in the 2011 Federal Budget, the Department of Finance released a consultation paper seeking input on the rules governing EPSPs.  

In its announcement, the Department of Finance noted the significant recent increase in the number of EPSPs.  Between 2005 and 2009 the number of EPSPs increased about five fold, mostly amongst owner-managed private corporations.  Given such, the Department of Finance is interested in seeking stakeholder input on the following questions:

1. Who should be eligible to participate in EPSPs?
2. The role of minor children with EPSPs.
3. Should there be a limitation on contributions to EPSPs?
4. Should there be withholding tax requirements on contributions to EPSPs?

The closing date for submissions to the Department of Finance is October 25, 2011.  It appears that the Department wishes to eliminate any mischief with the use of EPSPs by amending the existing EPSP legislation.  Given such, owner-managed corporations that use EPSPs should brace themselves for possible changes soon.  Given the complexities of creating and maintaining EPSPs (and the recent announcement by the Department of Finance), proper legal and tax advice is should be obtained when dealing with EPSPs.

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