28 January 2000 External T.I. 1999-0008045 - LEAVE PLAN EMPLOYER PAYMENTS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Can we confirm that a plan does not satisfy 6801(a) of the Regulations?

Position: Yes

Reasons: 6801(a) conditions are not satisfied.

XXXXXXXXXX 1999-000804
M. P. Sarazin
Attention: XXXXXXXXXX

January 28, 2000

Dear Sirs:

Re: Employee Leave of Absence Plan

This is in response to your letter dated November 19, 1999, wherein you requested our views regarding an Employee Leave of Absence Plan (the "Plan") that was recently approved by your board and the Employee's Association. In our telephone conversation on January 20, 2000, you advised that the Plan has already been implemented by the XXXXXXXXXX (the "Employer").

The Plan is not a deferred salary leave plan as described in paragraph 6801(a) of the Income Tax Regulations. Under the terms of the Plan, an employee who has applied and been approved to participate in the Plan (a "Participant") is paid his or her regular salary net of the normal withholdings under the Income Tax Act (the "Act"), the Canada Pension Plan Act and the Employment Insurance Act and the net pay is further reduced by an additional amount (the "Contributions") equal to 10% of the Participant's gross pay. The Employer will retain the Contributions and, in the fifth year of a Participant's participation in the Plan, the Participant takes his or her leave of absence. During the leave of absence, the Participant will be paid a monthly amount. The monthly amount will be computed by taking the Contributions made into the Plan by the Participant plus any accrued interest on such Contributions computed at the rate paid on the Employer's operating account plus an Employer amount equal to the Participant's Contributions plus any accrued interest computed thereon divided by twelve.

You are of the view that the accrued interest and the Employer matching amount (equal to the Participant's Contributions plus any accrued interest) will be taxed as employment income when the amounts are received by the Participant during the leave of absence. The Contributions would be returned tax-free to the Participant.

Comments

In your letter you have outlined what appears to be an actual fact situation related to an existing Plan. We must advise you that the review of an existing Plan falls within the responsibility of tax services offices. However, we can provide you with the following general comments.

We agree that the Plan does not satisfy paragraph 6801(a) of the Regulations because several of the conditions described therein are not satisfied by the Plan. Since the Participants are including their full salary before any deduction of Contributions to the Plan in their income, the Plan would not be considered a salary deferral arrangement within the meaning assigned by subsection 248(1) of the Act.

We would have to review the facts and the Plan to determine how the amounts paid to a Participant would be taxed under the Act. In particular, a Participant's rights to receive amounts under the plan, the Employer's obligations and restrictions with respect to the Contributions made by a Participant, the existence of a custodian relationship or the existence of a trust would have to be reviewed to determine whether the Plan would constitute an employee benefit plan, a salary deferral arrangement or an employee savings plan for purposes of the Act. The expressions "employee benefit plan" and "salary deferral arrangement" have the meaning assigned by subsection 248(1) of the Act. The Department's general views on employee benefit plans and employee savings plans are found in the enclosed Interpretation Bulletin IT-502.

We trust the above comments will be of assistance to you.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate

ENCLOSURE