30 November 1997 Ruling 9728693 - 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:

Whether deferred salary leave plan meets the requirements of 6801(a) of the Regulations.

Position:

With amendments, plan will satisfy requirements.

Reasons:

Conditions set out in 6801(a).

XXXXXXXXXX							972869
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your request of XXXXXXXXXX, for an advance income tax ruling concerning a Deferred Salary Leave Plan (the "DSLP") and further to our telephone conversations XXXXXXXXXX.

PROPOSED TRANSACTION

The Employer proposes to implement a DSLP for its employees. A copy of the terms of the DSLP was submitted with your request which can be summarized as follows:

1. It will permit an eligible teacher ("Participant") to fund a leave of absence from employment.

2. The Leave of Absence Period ("LAP") will be for one year, from July to June and will generally commence immediately after a four year deferral period.

3. During the deferral period, the Participant will defer 20% of her or his salary which will be held in trust in a separate bank account.

4. Income earned on the deferred amount will be paid to the Participant on December 31 of each year during the deferral period.

5. The deferred amount will be paid to the Participant during the LAP in 10 equal monthly payments starting in September of the LAP.

6. Following the LAP the Participant must return to her or his regular employment with the Employer for a minimum of one year.

Before implementing the DSLP, the Employer will amend its terms as follows:

7. The term "interest" as used in section XXXXXXXXXX, must be replaced with the term "earned amount".

8. Section XXXXXXXXXX will be amended by adding after the word "Board" the words "or any person or partnership with which the Board does not deal at arm's length".

PURPOSE OF PROPOSED TRANSACTION

The purpose of the proposed DSLP is to give the Participant the opportunity to finance an unpaid leave of absence by deferring portions of their regular salary and not to provide benefits upon or after retirement.

OTHER INFORMATION

To the best of your knowledge none of the issues involved in this ruling is being considered by a Tax Services Office or Taxation Centre in connection with a tax return already filed nor is under objection or appeal.

RULINGS GIVEN

Provided that the terms and conditions of the proposed DSLP as described in your submission and amended as above constitute complete disclosure of all relevant facts, and the DSLP is implemented as proposed, we rule that:

An arrangement in writing between a Participant and the Employer in accordance with the DSLP will satisfy the requirements set out in paragraph 6801(a) of the Income Tax Regulations and, therefore, will not be a "salary deferral arrangement" as defined in subsection 248(1) of the Income Tax Act.

The above advance income tax ruling is given subject to the limitations and qualifications set forth in Information Circular 70-6R3 of December 30, 1996, issued by Revenue Canada, and is binding upon Revenue Canada provided the proposed DSLP is implemented by XXXXXXXXXX.

COMMENTS

As discussed during our telephone conversation, we are unable to provide rulings on the consequences of the DSLP for Employment Insurance (EI) Act and Canada Pension Plan (CPP) purposes.

Any enquiry should be directed to Mr. Pierre M. Paquette at (613) 952-5422 or to the following address:

CPP/EI Eligibility Division
7th Floor
400 Cumberland St.
Ottawa ON K1A 0L8

While we are not able to provide you with the requested rulings directly, the following opinions reflect the Department's position concerning EI premiums and CPP contributions:

9. EI premiums are to be based on a Participant's gross salary, before deferrals, during a Deferral Period and no premiums are to be withheld from the Deferred Amounts when paid to a Participant during a Leave of Absence.

10. It is the Department's position that CPP premiums are to be based on the aggregate of a Participant's salary net of the Deferred Amount during the Deferral Period and any interest paid on the Deferred Amount and on the Deferred Amount when paid to the Participant during the Leave of Absence. When the deferred amount is paid to the Participant by a trustee of the DSLP during the leave period, that trustee is deemed by the CPP Act to be an employer of the Participant and is therefore required to pay the employer's CPP contribution in respect of that Participant. Where the trustee/employer recovers the employers's CPP contribution from amounts otherwise payable to the Participant, it is our view that this recovered amount will not be part of the Participant's gross salary from that trustee/employer and therefore need not be included on the Participant's T4 slip.

Although the trustee is deemed under the CPP Act to be an employer, the Participant does not enter into new employment with the trustee when she or he goes on leave. Consequently, while CPP contributions that are required to be paid during the leave period are to be deducted and remitted by the trustee as by any other employer, CPP contributions paid in the year prior to the leave period must be taken into consideration by the trustee. For example, if the required CPP contributions for a year by a Participant were $600 and the Participant contributed $400 before going on leave, the trustee would be required to deduct and remit CPP contributions for that year of $200 on behalf of the Participant, plus the employer's portion.

The trustee will be required to prepare T4s reflecting the amount paid by the trustee to the Participants under the DSLP and, among other things, the CPP contributions. However, since CPP contributions made during the year prior to the leave period are to be taken into consideration by the trustee, the amount of contributory earnings reported by the trustee may not coincide with the earnings reported in box "C" for that particular year. If such is the case, the amount of contributory earnings must be recorded in box "I" of the T4 which should in turn coincide with the amount of contributions reported in box "D". There may also be instances where the trustee will not have made any deductions for CPP because the Participant reached the maximum contributions prior to the leave period. If such is the case, a check mark should be indicated in box "J" of the T4 under CPP.

If further information is required concerning the trustee's responsibility with respect to CPP contributions or the preparation of T4s etc., enquiries should be made through Mr. Paquette at the address noted above.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch