Register a deferred profit sharing plan - Conditions for registration

2. Conditions for registration

The profit sharing plan must meet certain legislative and administrative requirements in order to be registered as a DPSP under the Income Tax Act.

Legislative requirements

The plan terms must have the following conditions:

  • the trustee must allocate all the payments received in the year to the beneficiary for whom the amounts are paid
  • contributions can only be made by the employer based on the plan terms, as well as amounts transferred under subsection 147(19) of the Act
  • no loans can be made to an employee or other beneficiary
  • funds in the plan cannot be invested in notes, bonds, debentures or similar obligations of an employer who contributes to the plan, or of a corporation which does not deal at arm’s length with that employer
  • funds in the plan cannot be invested in shares of a company where at least 50% of its property consists of notes, bonds, debentures or similar obligations
  • no right or interest of an employee who is a beneficiary under the plan can be surrendered or assigned (either partially or fully) except:
    • on marriage breakdown or breakdown of the common-law relationship
    • on death, or
    • to avoid revocation of the plan
  • each of the plan trustees must be a resident of Canada
  • the trustee can either be an Canadian corporation authorized to be a trustee or three or more individuals
  • all trust income, capital gains made, or losses incurred, must be allocated to the beneficiaries within 90 days of the end of the trust year
  • all allocations or reallocations to a beneficiary must vest after two years
  • all forfeited amounts and their earnings must be paid to the employer or reallocated to beneficiaries on or before December 31 of the year immediately following the year the amount is forfeited
  • the trustee must inform, in writing, all new beneficiaries of their rights under the plan
  • all vested amounts must be paid from the plan to the beneficiary no later than the earliest of the end of the year the beneficiary turns 71 or 90 days after the earliest of the death of the beneficiary, the day the beneficiary leaves employment, or the termination of the plan
  • beneficiaries may receive equal annual payments from the plan for a period of 10 years or less, or have an annuity purchased from a licensed annuity provider that starts no later than the end of year they turn 71, with a guarantee period not greater than 15 years
  • except where allowed by paragraph 147(2)(k.1) of the Act, no benefit or loan that is conditional on the plan’s existence can be offered to a beneficiary
  • a beneficiary under the plan cannot be an individual who is:
    • a person related to the employer
    • a person who is, or is related to, a specified shareholder of the employer or of a corporation related to the employer
    • a person related to a member of the partnership if the employer is a partnership
    • a person who is, or is related to, a beneficiary under the trust if the employer is a trust

For more information see paragraphs 147(2)(a-l) of the Act.

Administrative requirements

The plan must also meet the following administrative rules:

  • the plan does not allow for divesting because of dismissal for cause or union membership
  • the trustee(s) must have sufficient authority to implement and operate the plan, and make sure that the payment of benefits to beneficiaries is made
  • if the trustees are authorized to borrow monies against the assets of the trust, this can only be on a short-term basis in order to facilitate the payment of benefits under the plan
  • any employee contributions made before 1991 and amounts transferred to the plan on behalf of the beneficiary from another DPSP are fully vested in the beneficiary. After 1990, employee contributions are not allowed, except for a transfer of amounts from another DPSP

For more information see paragraph 17 of IC 77-1R5 Deferred Profit Sharing Plans.

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