24 November 2000 External T.I. 2000-0054075 - DEFERRED SALARY LEAVE PLAN

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: Would the conditions in 6801(a)(v) be satisfied if the employee retires after the leave of absence

Position: No

Reasons: The provision requires that the employee returns to his or her regular employment with the employer or another employer that participates in the same or similar arrangement for a period that is not less than the period of leave. Retirement of the participant would not satisfy this condition.

XXXXXXXXXX 								2000-005407
M. P. Baldwin
Attention : XXXXXXXXXX  

November 24, 2000

Dear XXXXXXXXXX:

Re: Deferred Salary Leave Plan

This is in reply to your facsimile of November 1, 2000 in which you request a technical interpretation on a deferred salary leave plan and whether a person can retire immediately following the year the leave of absence is taken.

Comments

Paragraph 6801(a) of the Income Tax Regulations (the "Regulations") sets out the rules governing Deferred Salary Leave Plans ("DSLP"). Subparagraph 6801(a)(v) of the Regulations, in particular, requires that the plan provide that "the employee is to return to his regular employment with the employer or an employer that participates in the same or a similar arrangement after the leave of absence for a period that is not less than the period of the leave of absence".

The February 4, 1988 Regulatory Impact Analysis Statement describing the condition in subparagraph 6801(a)(v) states that the employee must return to his or her regular employment with the employer after the period of leave. The purpose of the provision, in general, contemplates a period of leave of absence from work, followed by a return to work and not a subsequent retirement or absence from work. Consequently, in our view, a leave of absence followed by the retirement of the participant in the plan, violates the intent of paragraph 6801(a) of the Regulations because the employee does not intend to return to his or her regular employment.

Where an arrangement met the provisions of paragraph 6801(a) of the Regulations, and it is reasonable to assume that after the time the arrangement is entered into, that either or both parties cannot abide by the provisions, then the arrangement between the employer and the employee will fail to meet the requirements of the Income Tax Act (the "Act") to be a prescribed plan. Consequently, the employer should terminate the arrangement and all deferred amounts plus unpaid interest, if any, should be paid to the employee less applicable withholding tax, and included in his/her income for the year. There is no additional penalty imposed by the Act in these circumstances.

If the arrangement is not terminated, it would be subject to the salary deferral arrangement rules in the taxation year it is known that conditions cannot be satisfied and the accumulated amount in the arrangement (deferred amounts and unpaid interest) would be taxable employment income in that year. In addition, any further amounts that are deferred and any interest accrued after the time the arrangement becomes a salary deferral arrangement are taxable in the taxation year of the deferral.

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

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate