26 July 1999 External T.I. 9913835 - DPSP - PERSON RELATED TO EMPLOYER

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether children employees may be beneficiaries of a DPSP.

Position: Not if they are related to the "employer" corporation in contravention of paragraph 147(2)(k.2).

Reasons: Where shares held in trust and trust beneficiaries are the grandchildren, employee children are probably related to "specified shareholders" of the employer.

XXXXXXXXXX 		991383

Attention: XXXXXXXXXX

July 26, 1999

RE: Deferred Profit Sharing Plan (“DPSP”) - Person Related to the Employer

This is in reply to your facsimile transmission of May 18, 1999, and further to our telephone conversation (Spice/XXXXXXXXXX) of July 26, 1999. You ask whether an employer corporation, the shares of which are held in trust for the benefit of grandchildren of the settlor, can establish a DPSP for its employees, some of whom are children of the settlor.

The situation to which you refer is an actual fact situation and we are unable to confirm the tax consequences of establishing such a plan except in the context of an advance income tax ruling. We can provide, however, the following non-binding opinion.

Paragraph 147(2)(k.2) of the Income Tax Act (the “Act”) provides that a plan may not be registered as a DPSP if the plan permits a person related to the employer or a person who is, or is related to, a “specified shareholder” of the employer to become a beneficiary of the plan.

Subsection 248(1) of the Act defines “specified shareholder” as a taxpayer who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of the capital stock of the corporation. In a situation where the corporate employer’s shares are held in trust, the definition also provides that each beneficiary of the trust is deemed to own that proportion of all the shares owned by the trust at that time that the fair market value at that time of the beneficial interest of the beneficiary in the trust is of the fair market value at that time of all beneficial interests in the trust. Furthermore, the definition of “specified shareholder” deems a taxpayer to own each share owned at that time by a person with whom the taxpayer does not deal at arm’s length.

Thus, a plan which provides for a particular employee to be a member will not qualify for registration as a DPSP if the particular employee is related to or otherwise does not deal at arm’s length with one or more of the grandchildren who are “specified shareholders”.

We trust this assists.

Yours truly,

P. Spice
for Director
Financial Industries Division
Income Tax Rulings &
Interpretations Directorate