Employee profit-sharing is a slightly different variety of tax planning that has been uncovered. As I'm sure everyone is probably aware, employee profit-sharing plans are used largely to align the interests of employees with those of their employers by giving them in some ways a stake in the business.
The way employee profit-sharing plans currently works is that the employer makes a tax-deductible contribution to the trust. Unlike an RCA, every year the trust allocates all the income and all the assets of the trust to the beneficiary of that particular trust, and then it's paid out in accordance with the trust document on a tax-free basis.
What has been observed is that these employee profit-sharing plans are being used to split income. A spouse may be a part-time employee or something of a business; amounts are paid into this employee profit-sharing plan, and effectively it's used to achieve income splitting, to avoid CPP and EI premiums, and to defer income tax, because there is no withholding tax.
To close this planning opportunity, this rule would impose tax at the highest rate once the amount allocated under the employee profit-sharing plan exceeds 20% of the employee's salary otherwise calculated.