Changes to Employee Profit Sharing Plans
About the Author: Wilson Wong PC, are Chartered Accountants in Calgary providing tax and accounting services to small and medium sized businesses and high networth individuals.
Recently there have been changes that will affect the Employee Profit Sharing Plan (EPSP) used by companies to remunerate shareholders or family members to shareholders.
The Recent 2012 Budget proposed and now passed as legislation will change the EPSP as follows:
- A penalizing tax will be paid by the employee for “excess” amounts of EPSP payments.
- The excess amount is calculated as any amount exceeding 20% of that employee’s normal salary.
- If you pay yourself only a nominal salary then that would make almost the entire amount of your EPSP payment considered “excess”
- The penalizing tax will be a tax paid by the employee at the rate of 39% of the income
- This tax is in in lieu to any normal income taxes you would otherwise pay.
- These changes are effective for all payments out of the EPSP after March 29, 2012 unless the company has agreed to pay EPSP amounts before that date then you have until March 29, 2013 to complete these remaining payments.
You have likely made payments out of the EPSP since March 29, 2012 and that is the first item of concern. According to the rules the Company needs to have agreed to be paying out those amounts before March 29, 2012.
The second item of concern is closure of the EPSP. Should you find no more use for the EPSP you should close the EPSP bank account and that’s all you need to do from your end. Legal counsel is not a requirement to close the EPSP. In essence, the EPSP itself still exists but would not be utilized anymore and any filings that accompany the EPSP will simply not be filed anymore.
Final item of concern is you may need to change the way you remunerate yourself. Personal remuneration is a complex question to address in writing. As such please feel free to contact me to discuss new options in remuneration.
-Wilson Wong, Chartered Accountant