Employee Profit Sharing Plan (EPSP)

What is an Employee Profit Sharing Plan?

An Employee Profit Sharing Plan is a mechanism available under the Income Tax Act that allows you to receive income from the corporation without either the employee or the company being subject to payroll levies such as Canada Pension Plan (CPP) and Employment Insurance (EI) contributions.

An EPSP allows an employer to deposit, into a Company Trust, money that would normally be paid as income to an employee who is part of the plan (a “participating employee”). This exempts both the employer and the employee from CPP and EI payroll deductions.

Would I still be entitled to receive Canada Pension Plan benefits upon retirement?

Yes, however, benefits may be reduced. CPP benefits are based on the number of years a person contributes into the plan, as well as the amount contributed in those years. Therefore any periods where there are no contributions to the plan could reduce the possible benefits available from the plan. Exceptions to this include the 15% drop-out rule that eliminates the pensioners’ lowest contribution period from the benefit calculation, as well as the provision exempting the period for child-rearing for children up to 7 years old.

What about my entitlement to Employment Insurance?

An employee could become ineligible for Employment Insurance or other benefits as a result of not contributing EI, and so should carefully consider participating in the EPSP.

For example, an employee who may be planning a family will need an uninterrupted twelve-month contributory period prior to claiming maternity benefits; however, a long-term employee/owner could expect an exit package upon termination that would make them ineligible for EI benefits in any case.

Is there a particular type of employee who would be best suited for an Employee Profit Sharing Plan?

Yes. Business owners and executive management can gain substantially from participating in an EPSP. The money that would otherwise have gone to CPP deductions can instead be contributed to their RRSP, or any savings product that would capitalize on the power of compounding over the years.

If I’m the employer, how can I make sure I take the best advantage of this option for both my company and the employee-participants?

Employers should consider paying bonuses into an EPSP. Usually, when employers pay a bonus to an owner or an employee, the employer must pay payroll taxes and the employee’s bonus is subject to CPP contributions, Employment Insurance contributions, and withholding taxes.

Are payments through an EPSP subject to EHT?

Ye, for companies with an annual remuneration cost in excess of $400,000, the Employee Health Tax (EHT) levy of 1.95% will continue to apply to that portion of the remuneration in excess of $400,000.

Can you give me an example of how much I could save if I didn’t contribute to the CPP or Employment Insurance?

For the year 2004, the annual CPP and EI contributions for employees earning $40,500 and over would be as follows:

Contributing Party	CPP	EI	Total
Employee Contributions	$1,831.50	$722.20	$2,553.70
Employer Contributions	$1,831.50	$1,081.08	$2,912.58
Total Contributions	$3,663.00	$1,803.28	$5,466.28

If you are an employer-participant, it can translate into accumulated savings of $38,264 over 7 years. And remember, this money can grow even more in an investment of your choice.

Is an Employee Profit Sharing Plan a complicated arrangement?

Actually, it is a relatively simple arrangement: