Established under section 144(1) of the Income Tax Act, the EPSP is a special purpose trust that allows the beneficiaries of the plan to share in the profits of a company. The allocations to an EPSP are taxable to an employee and a deductible expense for an employer.
Advantages of the EPSP:
- They do not require either employer or employee Canada Pension Plan (CPP) or EI contributions.
- They provide more control over retirement assets.
- They are treated as pension and/or RRSP-eligible earnings.
- Source deductions and withholdings are not required by the EPSP trustee or employer.
- They allow for income-splitting opportunities.
- Amounts paid from an EPSP to an employee are not subject to a “reasonableness” test, unlike salaries.
- The “kiddie tax” rules should not apply to income received by minor children who are bonafide employees of the business from an allocation from an EPSP.
- Contributions to the EPSP can be made up to 120 days after a corporate year-end.
Setting up and running an EPSP requires special knowledge in areas such as accounting, employment and tax law, and employee benefit plan construction. Many employers and their accounting professionals will need to seek assistance from outside services to help them with EPSP setup, maintenance and wind-up. It is worth the time and money to work with an employee benefit consultant who can assist in the design, implementation, maintenance and wind-up of your EPSP solution. IRONSHIELD Financial Planning can support you through the entire process.
