Fixing errors in a deferred profit sharing plan
From: Canada Revenue Agency
If an error occurs that causes a deferred profit sharing plan (DPSP) registration to become revocable under the Income Tax Act, the employer or trustee should write to us to explain what has happened so that we can work with them to bring the plan back into compliance with the tax rules.
Some examples of common errors that can occur are:
- plan provisions have not been complied with
- contributions have been made that are above the annual limit set out in the Act
- contributions have been made to the plan on behalf of an individual who is related to the employer or who is, or is related to, a specified shareholder of the employer or of a corporation who is related to the employer
The following will give general guidance on the steps to take when contributions have been made to a DPSP on behalf of a specified shareholder of the employer, and will outline the impact on the individual and the employer. Additional guidance is provided when contributions have been made above the annual limit.
Removing a specified shareholder as a plan beneficiary
As noted, making contributions to a DPSP on behalf of a specified shareholder of an employer is a violation of the registration rules under paragraph 147(2)(k.2) of the Act, and the Minister may issue a notice of intent to revoke a plan’s registration under paragraphs 147(14)(c.3) and (h) of the Act.
In order to avoid revocation, we require a letter from the employer or trustee advising that the individual is no longer a beneficiary under the plan, and that all contributions and any forfeited amounts made on behalf of the individual have been removed from the plan. We may provide an administrative relief letter advising that we will not issue a notice of intent to revoke a plan’s registration, if we are satisfied that the contributions have been removed from the plan.
How it affects the individual
An individual who is related to an employer or who is a specified shareholder of an employer must include in income all amounts contributed as well as any forfeited amounts that are allocated or reallocated under a DPSP on his or her behalf.
When the contributions have been made over multiple years, the individual’s pension adjustment (PA) will be affected. The employer must issue a revised T4 slip for any changes to the PA. When sending in a revised T4 slip to the tax center, also include a copy of the administrative relief letter issued by us.
How it affects the employer
The employer cannot claim a deduction for the ineligible contributions under subsection 147(9.1) of the Act. As a result, a revised T2, Corporate Income Tax Return may need to be filed for all affected tax years.
Contributions above the annual limit
A DPSP is revocable if contributions are made to the plan that are above the limits of subsection 147(5.1) of the Act. Depending on the reason for the excess contributions, we may, on an administrative basis allow for a refund of the excess contributions. We will also work with you to fix the PA as reported on the T4 slip. Please write to us explaining the situation and how it occurred.
Send us your letter
Registered Plans Directorate
Canada Revenue Agency
Ottawa ON K1A 0L5
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