Special Tax on Employee Profit Sharing Plans (EPSPs)

A special tax at the top marginal rate will be charge to a “specified employee” for contributions to an employee profit sharing plan if the contribution exceeds 20% of the employee’s salary received in the year.

A “specified employee” is an employee who has a significant equity interest in the employer or who does not deal “at arm’s length” with the employer. These would generally be family members who are shareholders in and employees of a private corporation. Where this tax is applied, a  deduction will be allowed for the excess EPSP contribution so that it is not taxed twice.

This tax is calculated on Form RC359 and added to federal taxes on line 418.

The equivalent of both the federal and provincial taxes are included on this line. For example, the applicable rate for Ontario for 2012 is 47.97%. Employees subject to this new tax may claim a deduction on line 229 for the amount subject to the tax.