28 November 2006 Internal T.I. 2006-0211401I7 - Various Q&As re Deferred Salary Leave Plans

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.

Principal Issues: The Toronto North TSO gave a presentation regarding Deferred Salary Leave Plans. The attendees had several follow up questions.

Position: Answers provided

									November 28, 2006

	TORONTO NORTH TSO						HEADQUARTERS
									Income Tax Rulings
	Attention:  Dave Ford			  		Directorate
									Renée Shields
(613) 948-5273

									2006-021140

Deferred Salary Leave Plans

This is in response to your electronic correspondence of October 20 and 26, 2006 requesting our assistance in responding to several participant questions you received following your Outreach Seminar on the subject of deferred salary leave plans ("DSLPs").

Question 1

This question relates to subparagraph 6801(a)(iii) of the Income Tax Regulations (the "Regulations"), which provides that during a period of leave under a DSLP, the participant cannot receive any salary or wages from the employer or any person not at arm's length from the employer (other than the deferred amount and any usual fringe benefits). The question is whether a DSLP participant who is employed by a school board in Ontario and is taking the leave period under the DSLP can receive remuneration from another school board.

Whether a particular employer is at arm's length with another employer is always a question of fact. Reference may be made to IT-419R, "Meaning of Arm's Length" for a more detailed discussion of the concept. However, it is our understanding that the various school boards are autonomous bodies unto themselves in that there is a separate one in each Ward which stand alone, separate and apart from each other. Each school board is made up of elected officials and it is the trustee of each one who decides on that board's operations. Each school board negotiates its own collective agreement (separate and apart from the other boards) with the various unions its employees are associated with, where the number of employees, their salaries, benefits, etc. are fixed and defined. The only common thread, which exists among the school boards in Ontario, is that the teachers belong to the same provincial pension plan and the business staff all belong to the Ontario Municipal Employees' Retirement System.

Based on the above understanding, it is our opinion that the school boards in the Province of Ontario deal at arm's length. Accordingly where an employee is on a leave period under a DSLP with one Ontario school board, the employee would be able to receive remuneration from another school board without violating paragraph 6801(a) of the Regulations.

Question 2

This question asks for our clarification of the requirement in subparagraph 6801(a)(iv) of the Regulations that income earned on the deferred salary retained for each participant be paid to the participant in the year the income is earned. There is a concern that there would be difficulty calculating and paying out the income by December 31 of each year.

The requirement in the Regulations is very specific and requires that the income be paid in the year, which means that it should be reported on a T4 for the particular year, and the employee would include the amount in his or her employment income for that year.

Question 3

This question asks about the consequences if a participant becomes ill during the leave period and is unable to return to work, as required by subparagraph 6801(a)(v) of the Regulations.

It is our position that where the arrangement meets the requirements of the Regulations at the time it is entered into, but at some later date, due to unforeseen circumstances, the employee cannot abide by the agreement, it is at that point that the arrangement fails to be a prescribed plan pursuant to paragraph 6801(a) of the Regulations. Accordingly, the employer should terminate the arrangement and all deferred amounts plus unpaid interest, if any, should be paid to the employee, less any applicable withholding tax, and included in the employee's income in the year in which the participant cannot meet the agreement.

Question 4

This question is similar to Question 3, but deals with the scenario in which the participant decides to retire after the leave period.

If it is evident that an employee has entered into a DSLP arrangement with the intention of retiring following his or her leave of absence, the plan would not qualify as a DSLP. Any deferred salary would be taxable in the year earned rather than in the year received. In such cases, the CRA may reassess prior year returns if there was unreported deferred salary in those prior years.

However, as noted above, where the decision to retire is due to unforeseen circumstances that arise subsequent to entering into the DSLP arrangement, it is at that point in time that the plan will cease to comply with the Regulations and all remaining deferred amounts plus any unpaid interest must be paid as noted above.

Question 5

This question seeks confirmation of the maximum deferral period available under the DSLP rules.

Subparagraph 6801(a)(i) of the Regulations requires that the leave period begin immediately after a period that not exceeding six years after the date on which the salary deferrals for the leave of absence commence. The practical result of this requirement is that salary can be deferred for no more than 6 consecutive years.

We have enclosed a copy of a very detailed letter we have prepared on the subject of DSLPs, which answers many of the questions that arise on the subject. Please feel free to use and share this document as needed.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

Enclosure