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Arrangement did not constitute an employee profit-sharing plan: CPP payments required

The Federal Court of Appeal just decided that an accountant who received payments from a professional corporation he created did not properly create an arrangement that constituted a true employee profit-sharing plan. It was necessary for the professional corporation to make an election that payments would be based on profits; failing that, it was necessary for the professional corporation to have a set formula stating an amount to be computed by reference to profits so the employer was obligated to pay that amount to the trustees under the arrangement.

Facts of the case

A chartered accountant created a professional corporation to provide accounting services. He was the only accountant, and there were two other employees who were family members performing other services.

The accountant entered into an employee profit-sharing plan trust indenture and received payments from the professional corporation through the indenture. These payments were treated as amounts paid to an employee profit-sharing plan and allocated to the accountant. On the same day that the payments were made to the account, the funds were transferred to the accountant.

The Canada Revenue Agency assessed the professional corporation for contributions under the Canada Pension Plan, and the Tax Court of Canada determined that CPP amounts were payable in relation to the payments.

The professional corporation appealed to the Federal Court, but the court dismissed the appeal because it had not been established that the employee profit-sharing plan was valid for the purposes of the Income Tax Act.

The professional corporation appealed again to the Federal Court of Appeal.

The court noted that the Canada Revenue Agency’s position was that the payment of amounts to an employer to the trustees under a valid employee profit-sharing plan would not result in contributions being payable under the Canada Pension Plan.

However, the court held the following:

It was necessary to elect that the arrangement specifically provide that payments be made from profits. In this case, the professional corporation did not make such an election. Lacking an election, it was necessary to have a set formula that would produce an amount that had to be computed by reference to profits, which the employer was obligated to pay to the trustees under the arrangement. However, the board of directors of the professional corporation never established the formula contemplated by the indenture.

Payments had to be computed by reference to the company’s profits, and this was a binding obligation by the employer to make payments in accordance with the formula which refer to profits and which had to be paid in the event of profits. In this case, the payment was not computed by reference to profits, but was subject to the absolute discretion of the professional corporation. It appeared that the professional corporation was not obligated to make a payment.

The indenture also stated that the total contribution of the professional corporation for one year could not be less than one percent of the profits for the fiscal year. Therefore there was an obligation to make this minimum payment. However the total amount paid was about $157,800. One percent of this amount came to about $1,578. The payments that were made bore no resemblance to the minimum required payment of one percent of the profits.

Consequently, the payments made by the professional corporation did not constitute payments that were made under an arrangement that would qualify as an employee profit-sharing plan under the Income Tax Act.

As a result, the payments constituted a contributory salary and wages of the accountant for the purposes of the Canada Pension Plan. Payments to the CPP were required.

What can professionals, accountants and employers take from this case?

As can be seen from this case, in order to benefit from an employee profit-sharing plan, the company must actually make an election that the arrangement specifically provide that payments are made from profits.

If there is no such election, it is necessary to have a set formula stating an amount to be computed by reference to profits such that the employer is obligated to pay that amount to the trustees under the arrangement.

View the case here.

Christina Catenacci LLB, Editor, HRinfodesk, published by First Reference

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