EPSPs can be utilized by business owners to provide an alternative to a bonus.  The primary advantage is that the tax remittance on a bonus must be paid within 180 days of the corporation's fiscal year end, whereas, subject to the fiscal year end of the payor corporation, the EPSP tax remittance can be further delayed, which allows the corporation to utilize these funds and to earn addition interest income on these funds.

 Selected EPSP Issues to consider:

1. Taxation Considerations:

A bonus is considered a salary and the payor must withhold source deductions and report the amount on a T4 slip.  An EPSP payment has no source deductions and the payor must report the amount on a T4PS slip.  The income tax on an EPSP amount is paid directly via the personal tax return of the recipient.  In order to ensure deductibility, the EPSP payment date by the corporation must be within 120 days after the end of that fiscal year end.  Furthermore, the employee is taxable on this amount on this EPSP payment date.

Thus a corporation with a May 31, 2004 fiscal year end must make the EPSP payment within 120 days – ie by September 28, 2004.  The corporation then would prepare and file a 2004 T4PS slip by February 28, 2005 and the individual must pay the corresponding tax on this income in April 2005 when filing the 2004 personal income tax return.  In this example, under an EPSP the taxes are remitted in April 2005 whereas under a bonus the taxes are remitted in late November 2004.  This results in a 5 month postponement.

2.  CPP:

There is no CPP levied on EPSP amounts.

3. Documentation:

An EPSP requires the following documents:

(a) “EPSP Agreement” outlining the operation of the EPSP

(b) “EPSP Deed of Trust” wherein a trustee agrees to administer the EPSP funds in accordance with the EPSP Memorandum, and

(c) “EPSP Resolution” which is inserted into the corporate minute book wherein  the corporation adopts the EPSP.

4. Funds Flow:

The flow of funds is quite important to ensuring the EPSP payments are deductible.  There are typically 4 types of EPSP payments as shown below, and it is important to note that all EPSP payments must be properly evidenced by way of cheques and deposits – accounting journal entries are not sufficient evidence to support these payments.

(a) Initial EPSP from the corporation to the EPSP - The corporate employer must pay the gross EPSP amount to the trustee within 120 days of its fiscal year end.  The trustee must be able to demonstrate that it had received and deposited the full amount of the EPSP into its accounts within the 120 days.  Along with the payment, the employer will indicate to the trustee how the EPSP amount is to be allocated amongst the qualifying employees.

(b) After initial receipt, the trustee can hold or invest these funds until such time as they are paid out, or the trustee can loan the funds back to the payor corporation on an interest free basis.

(c) The corporation must repay any loaned EPSP funds when and as requested by the trustee.

(d) Within 15 months of initial receipt, the trustee must pay out 100% of the EPSP amount to the employee(s).  In certain cases the employee may direct the trustee to pay a portion of the funds directly to CRA to cover off the income tax liabilities, and to forward the balance of funds directly to the employee.

5. Amount of EPSP

The EPSP Agreement must call for a certain minimum amount to be paid out to the EPSP each year.  For example, a minimum amount of say 1% of the corporation profits would be adequate.  As a result, the EPSP would be active each year, either by way of paying out the minimum 1% of profits, or a larger amount.

6. Employee Personal Tax Installments:

In order to avoid the requirement for employee tax installments, EPSP amounts are often paid out every 2^nd year.

7. Canada Revenue Agency Registration:

There is no CRA registration required for an EPSP.

8. Termination:

The corporation can terminate the plan at any time without notice or penalties.

Notice to Reader

Please note that the above information is a summary only.  The specific taxation issues affecting each taxpayers situation are unique and should be investigated on a case by case basis.  Please contact Canham Rogers, Chartered Accountants to review your situation prior to implementing any of the strategies or transactions noted above.