Entrepreneurship & Small Business

Tax Question: EPSP and CPP/EI avoidance

  • Last Updated:
  • Dec 16th, 2010 10:28 pm
[OP]
Member
Dec 24, 2006
481 posts
239 upvotes

Tax Question: EPSP and CPP/EI avoidance

Does anybody know the current situation with regards to the CRA and Employee Profit-Sharing Plans (EPSP)? I know they lost the Greber case, but I wasn't able to find any updates about it and if they tried to change the legislation and close the loophole.

The benefit is to reduce tax reduction and avoid CPP/EI premiums, especially in the case of an incorporated small business where the owner is an employee.

Background info for those unaware of EPSPs (my limited understanding):
- Money designated for the EPSP goes into a trust, and is in turn distributed out to the employees
- Amount of distribution is a fully deductible business expense just like salary, but not subject to CPP or EI premiums
- Amount of distribution is not subject to the "reasonable" salary test, meaning there's the opportunity for greater income splitting with family members

Obviously the CRA doesn't like this and has made it a point to audit such cases. The website below lists several tests that they apply to evaluate if it's a valid EPSP.

http://www.cabusinessadvisor.com/Tax/Ta ... rofitS.htm

However, the CRA lost an important case about this in 2007 (Greber Professional Corp. v. Minister of National Revenue). Basically, the judge acknowledged that although the profit sharing was essentially remuneration equivalent to salary and against the intent of the tax legislation, it followed the letter of the law and the court would not make such distributions eligible for CPP and EI premiums.
5 replies
Newbie
May 12, 2010
1 posts
Canada
newest case is JR Saint & Associates - severely restricts Greber. Court found the EPSP to be a sham. Trust indenture misrepresented the true nature of the payments.
Newbie
Dec 8, 2005
34 posts
5 upvotes
If you are using an EPSP to avoid withholdings (CPP, EI), you will run the risk of CRA arguing that the plan was established for improper reasons.

An EPSP can have other tax advantages and perhaps it is best suited to be used for these other purposes.
Deal Addict
Aug 28, 2007
2063 posts
445 upvotes
Calgary
If you're concerned about paying EI/CPP why not shut down your payroll and just pay yourself and your family members with dividends?
Deal Addict
Jan 1, 2009
1064 posts
455 upvotes
Vancouver
Just Confused wrote: If you're concerned about paying EI/CPP why not shut down your payroll and just pay yourself and your family members with dividends?

I agree. This avoids the payroll taxes and the potential failure to remit or failure to deduct penalties for corporations/sole proprietors who do not know the payroll rules but register an RP0001 account anyway. Another sneaky avenue some accountants suggest is to take out a shareholder loan with the intent to repay it back within one year after the fiscal year end of corporation when the loan was issued. Failure to repay the back the loan within the period triggers an income inclusion (reported on the T4 slip) one year later, but this effectively defers taxation 2 years after the loan was taken out. The risk involved with this scenario is that as a specified employee/shareholder, the OP would have to demonstrate to CRA, if they audit, that the loan was taken out with every intention to pay it back by 1 year later after the corporation's FYE (assuming the OP is incorporated).

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