7 June 2013 External T.I. 2013-0488501E5 - DSLP - Fringe Benefits

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: Would certain payments made to an employee during a leave of absence under a deferred salary leave plan be acceptable for purposes of subparagraph 6801(a)(iii) of the Regulations?

Position: No.

Reasons: The payments described are not part of the salary deferred during the deferral period and, in our view, would not be considered fringe benefits.

XXXXXXXXXX
2013-048850
G. Allen

June 7, 2013

Dear XXXXXXXXXX:

Re: Deferred Salary Leave Plan – Miscellaneous Payments

This is in response to your correspondence of April 23, 2013 concerning whether certain payments made to an employee participating in a Deferred Salary Leave Plan ("DSLP") would be acceptable given the requirements outlined in subparagraph 6801(a)(iii) of the Income Tax Regulations (the "Regulations"). Specifically, you enquire whether a payment, in respect of statutory holiday pay or banked overtime, during a leave period or a lump sum payment made after a leave period in respect of an employee's position being reclassified during the leave period, would cause a DSLP to fail to satisfy the conditions of subparagraph 6801(a)(iii) of the Regulations.

The situation outlined in your letter relates to a factual one, involving a specific self-funded leave arrangement. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings". This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the CRA website at http://www.cra-arc.gc.ca. Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance.

In general, the salary deferral arrangement ("SDA") provisions in the Income Tax Act (the "Act") require that salary deferrals be included in an employee's income on an accrual basis (i.e., in the year that services are rendered and the salary is earned) notwithstanding that the salary may only be received in a subsequent year. However, if an arrangement complies with the DSLP rules, the SDA provisions will not apply and the employee's salary deferrals will be taxed when actually received, rather than when earned.

A DSLP is a plan or arrangement that permits an employee to defer salary or wages in order to fund a leave of absence from his or her employment. The rules governing DSLPs are set out in paragraph 6801(a) of the Regulations. Subparagraph 6801(a)(iii) of the Regulations provides that during a leave of absence under a DSLP, the employee cannot receive any salary or wages from the employer or any person not dealing at arm's length with the employer, other than the amount of salary deferred and any reasonable fringe benefits usually paid to employees.

The term "fringe benefits" is not defined for purposes of the Regulations and we generally accept that the term will have the same meaning as used in general practice. In our view, fringe benefits are employment benefits provided to an employee that are in addition to an employee's regular salary or wage. In the past, we have accepted continued health care benefits, continued insurance coverage, payment of membership fees, tuition reimbursements and provision of automobiles as fringe benefits for purposes of subparagraph 6801(a)(iii) of the Regulations. However, we have taken the view that vacation pay is not a fringe benefit, but rather, part of an employee's normal salary or wage. Accordingly, in our view, payments in respect of statutory holidays and banked overtime during an employee's leave of absence would not be fringe benefits for purposes of subparagraph 6801(a)(iii) of the Regulations. A payment made to an employee after the employee's leave of absence in respect of an employee's position being reclassified during the leave of absence would not appear to conflict with the provisions of subparagraph 6801(a)(iii) of the Regulations.

We trust that our comments will be of assistance to you.

Lita Krantz, CPA, CA
for Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

cc. Sohel Ahmed
Trust Accounts Division
Taxpayer Services and Debt Management Branch