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Vol.14 No.01

Your plan members

How to

To avoid losing the plan’s registration from the Canada Revenue Agency (CRA) and other unfortunate tax consequences, you must ensure employee eligibility before they join the deferred profit sharing plan (DPSP) and whenever there’s a change that may affect their status such as the integration of a new shareholder, a new issue of shares, a sale of shares or a restructuring.

According to Canada’s Income Tax Act, a person cannot participate in a DPSP if:

  • they are related to the employer (e.g., the employer’s majority shareholder or the spouse, child, brother, sister, mother, father, brother-in-law, or other relation of the employer’s majority shareholder);
  • they are a specified shareholder of the employer or of a company related to the employer, or if they are related to such specified shareholder;
  • they are related to a member of the partnership, if the employer is a partnership; or
  • they are, or are related to, a beneficiary under the trust, if the employer is a trust.

As a general rule, under the Income Tax Act (Canada), a specified shareholder is a person who owns, directly or indirectly, at least 10% of the issued shares of any class of the capital stock of the company or of any other related company. For the purposes of determining the 10% threshold, a person is deemed to own the shares of a company held by a person with whom they do not deal at arm’s length, such as a spouse, child, brother, sister, father, mother or brother-in-law.

Important: These definitions are not exhaustive. For advice on your specific situation, please speak to your tax specialist.

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