Entrepreneurs
and owner-managers are faced with the challenge of how to
withdraw the maximum amount of money from their businesses
in the most tax effective way. Happily, there is a simple
solution. We use the employee profit sharing plan trust
(EPSP) to split income between family members and designated
employees. The allocations are taxable in the hands of the
employees and are a deductible expense for the business.
Interestingly, the amounts allocated from an EPSP are not
subject to a reasonableness test, unlike salaries.
The
amounts paid are entirely at
the discretion of the owner manager. For this reason the EPSP is an ideal tool for income splitting between family
members.
| Trust
Requirements: |
The
rules regarding an EPSP are set out in the Income
Tax Act. The key issue is that amounts paid through
an EPSP must be calculated with reference to profits.
This allows for much flexibility.
As
with any trust, a trustee (who could be the entrepreneur)
is required. There is also a requirement to file with
Canada Customs and Revenue Agency (CCRA) the EPSP
plan.
|
Reporting
Requirements : |
Unlike
a family trust there is no return to be filed for
the EPSP. Amounts that are allocated from the EPSP
are taxable in the hands of the employees and are
reported on forms T4PS.
|
| Source
Deductions : |
Payments
to an EPSP are not subject to source deductions. Therefore,
there is no requirement to make withholdings for income
taxes, employment insurance premiums or Canada Pension
Plan. |
Terms and conditions:
All documents and information provided by JWL Management
Inc. are strictly confidential. A retainer of $5,350 (CDN,
includes GST) is payable in trust to JWL Management Inc.
before commencement of work.
| For
Example : |
William
Shankly is an entrepreneur. In 2001 he has income
from the business of $100,000. His wife is a homemaker
and cares for their teenage son. The Shankly's wish
to minimize their tax obligations. The present situation
can be summarized thus:
ANNUAL
INCOME |
100,000 |
TAXES
PAYABLE |
31,000 |
NET
DISPOSABLE INCOME |
69,000 |
Mr.
Shankly establishes an EPSP trust to minimize his
tax liability. By income splitting with his wife and
son he could realize the following savings:
|
Husband |
Wife |
Son |
|
|
|
|
ANNUAL
INCOME. |
45,000 |
45,000 |
10,000 |
TAXES
PAYABLE. |
10,000 |
10,000 |
500 |
|
-------- |
-------- |
-------- |
DISPOSABLE
INCOME |
35,000 |
35,000 |
9,500 |
|
|
|
|
FAMILY
AFTER-TAX INCOME |
79,500 |
|
|
NET
SAVINGS |
(79,500
- 69,000) = 10,500
|
|
| For
more information, please contact: |
JWL
Management Inc.
3 Skyline Crescent NE
Calgary, AB T2K 5X2
CANADA
Phone:
(403) 295-6890
Email: gcpt@telusplanet.net |
|
