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Employment Profit Sharing Plan
Download the Employee Profit Sharing Plan Confidential Information Document (PDF)

Employee Profit Sharing Plans (EPSP)

Avoid paying CPP and E.I. !

Create an EPSP Trust and all distributions from the trust do not attract Canada Pension Plan contributions (employer and employee) or E.I. payments. The distributions are treated as pension and /or RRSP eligible earnings. Suited for an Owner Operator, and their family. Defined under section 144(10) of the Income Tax Act- A T4PS Form which is the equivalent of a T4 for income from an EPSP will be used. You will see that this Form does not have any boxes for Income Tax, CPP or EI Deductions. An inspection of the Federal Payroll Deduction Tables (T 4032) will also show that CPP and EI Deductions do not apply to T4PS Income. All the business owner has to do is open a second business bank account called OPCO Inc EPSP, we do the rest.

Based on Maximum insurable earnings of $42,100 for CPP and $39,000 for EI Total CPP & EI

Employer Contributions 2006			Employee Contributions 2006			Contribution
CPP	EI	Total	CPP	EI	Total	Savings
$1,911	$1,021	$2,932	$1,911	$729	$2,640	$5,572

Self Employed Contributions
CPP	EI
$3,821	$1,021

The EPSP was introduced primarily in order to have an Employer, with the agreement of the Participating Employees, contribute a portion of their T4 Income into an EPSP Trust. This Trust could then invest in a variety of assets including shares of the Employer. The advantages for a business owner are that T4PS income has no withholdings of any kind. The business owner has complete control of his income by paying most of his or her income as T4PS. CPP will knock off the lowest 15% of your earnings,whichisabout5 years. Go to http://www.sdc.gc.ca/en/ isp/common/cricinfo.shtml and click calculator (CDN Income calculator) and follow instructions to find out how your CPP benefit will change if you no longer contribute, however the calculator does tend to be inaccurate. CPP number for your info: 1800-277-9914.

The CPP premium has grown quickly over the last 20 years. A 490% increase from 1985.

Year	CPP	CPP% Increase From previous period
1966	$158.40	--
1975	$241.70	52%
1985	$759.60	214%
1995	$1,701.00	124%
2000	$2,659.80	56%
2001	$2,992.80	12.5%
2002	$3,365.20	12.4%
2005	$3,821.40	13.6%

Why CPP is a bad deal for Business Owners?

CPP provides a pre tax annuity of $10,135 at age 65 this year. Approx $5470 after tax-assume top rate 46%

With an average total premium of $3821 for 40 years to achieve full CPP pension, the business owner will contribute $3821x40=$152,840. That is with no interest, just contributions alone.

A 65 year old can buy an annuity with an after tax return of $5472 for approx: $74,000. A joint last to die policy with 100% survivor benefit will cost approx: $98,000. CPP only provides the survivor with 60% at most.

At McKenna Churchill and Associates we have determined that this means CPP is providing a negative rate of return between -3 or -4 % for the business owner and other shareholders.

Loss or reduction of EI and CPP benefits can be offset by properly investing the
savings. In some cases flexibility to invest these contributions should more than
make up for the lost benefits.

Advantages of the EPSP

They do not attract either Employer/Employee Canada Pension Plan (CPP) or EI contributions.
Allows for more control over your retirement assets.
They are treated as pension and /or RRSP eligible earnings.
There are no source deductions for Income Tax.

Case Studies:

A 30 yr old incorporated business owner, who has worked full time for 10 yrs. If the owner works until 65 he or she will have to contribute $3821 for 35 years in 2006 $’s to receive a pension of approx $10,000/yr.

If the owner instead saves this money at a 5% compounded rate of return for 35 yrs., the owner will have approx: $345,000. If the owner purchased an annuity at this time, he or she would get an annuity pension of appox: $47,000 before tax. plus approx $2500 of CPP pension for the 10yrs of contributions. A total of $49,500/yr. Or the owner could have $10,134/yr with CPP.

The choice is clear.

A 45 yrs old couple who own a business
They already have 20 yrs of contributions to CPP. They will receive at least 50% of the pension at 65 approx: $5,000 each. They open an EPSP and use the $7642 savings to purchase a leveraged loan at the prime rate for $60,000. This loan will be paid off in 10 years and they will get a tax deduction for the interest. At a 7.5% rate of return the $60,000 grows to $123,700 in 10 yrs. The loan has been paid back and now they take another 10yr loan of $60,000 and add that to the $123,700. At a 7.5% return, the $183,700 will grow to $378,000. So at age 65 the couple will have a total CPP pension of appox: $10,000/yr plus $378,000 cash which will generate $18,900/yr at a 5% return. Total cash flow is $28,900($18,900 +$10,000 CPP benefit) plus $378,000 in estate value vs. $20,000 for CPP alone with no estate value.

The choice is clear!