Published: March 6, 2020
Last Updated: June 11, 2021
An Employees Profit Sharing Plan (“E.P.S.P.”) is a trust that allows an employer to share business profits with some or all of its employees. The E.P.S.P. does not require registration.
Amounts are paid to a trustee to be held and invested for the benefit of the employees who are members of the plan.
Trust Not Taxed
No tax is payable by a trust governed by an E.P.S.P. on its taxable income. This means that like registered pension plans or R.R.S.P.’s, the income of the trust accumulates on an untaxed basis.
Taxation of Employees
The trust must make an annual allocation, either contingently or absolutely, amongst all of the E.P.S.P. members. The allocation includes the following:
- Contributions received from the employer
- Profits of the trust
- Capital gains and losses of the trust
This means that an employee pays tax annually on the activities of the trust on the amount alocated to him.
Payments to Employees
Since the employee is taxed on allocations, receipts from the E.P.S.P. are not taxable. In addition, if specific assets are paid by the trust to an employee the assets roll out at their cost base.
Deduction to Employer
The employer is entitled to deduct all amounts paid to the E.P.S.P. within 120 days of its year end. Furthermore, any amounts paid as administration fees to the trustee of the E.P.S.P. will be considered to be contributions to the E.P.S.P. which are deductible to the employer and must be allocated to the employees.
Benefits need not vest in employees immediately. The vesting period can vary in order to ensure employee loyalty.
If amounts have been allocated and have been taxed in the hands of an employee who subsequently leaves prior to the benefits vesting, the employee is entitled to a deduction for the unreceived amounts.
Required contribution by Employer
One of the fundamental requirements of the E.P.S.P. is that payments from the employer to the trust must be computed by reference to profits. A formula must be put in place which governs what the annual contributions will be.
There is also a provision for an election which permits formulae based on factors other than profits to be used.
The rules of the plan may also permit employees to make contributions to the E.P.S.P. These contributions are not deductible to the employee nor are they taxable when returned.
General Benefits of Plan
The following benefits make E.P.S.P.’s attractive for a company to consider:
- Tax free compounding in plan
- Deductions to employers
- Opportunity to reward employees
- Opportunity to help ensure employee loyalty
- No impact on R.R.S.P. or R.P.P contributions
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
Frequently Asked Questions
Employee profit-sharing is a compensation program that awards employees a percentage of the company’s profits each year. How profits are allocated to employees to will depend on how the employer has structured the profit sharing plan, but is most often dependant on that employee’s earnings for a year and length of service.
Your ability to make cash withdrawals from an employee profit sharing plan depends on how your profit sharing plan has been structured. Unless special provisions have been made as part of your profit sharing plan, generally funds will only be withdrawn once your employment is terminated.