7 October 2016 APFF Roundtable Q. 4, 2016-0652801C6 F - Salary Deferral Arrangement -- translation

Principal Issues: Whether the exception in paragraph (k) of the definition of salary deferral arrangement would be applicable in the situation described?

Position: No.

Reasons: The plan provides that the bonus is paid in the fourth calendar year following the taxation year in which the services are rendered by the employee.

7 OCTOBER 2016 APFF Roundtable

Question 4

Salary deferral agreement

Paragraph (k) of the definition of "salary deferral agreement" ("SDA") in subsection 248(1) provides that, in order to be excluded from the definition of SDA, a plan or arrangement under which a taxpayer has a right to receive a bonus or similar payment in respect of services rendered by the taxpayer in a taxation year, such amounts must be paid within 3 years following the end of the year.

The CRA's position with respect to the "paid within three years" test seems to us to be the following: "The law requires that the amount has to be paid within the three years period following the calendar year in which the right to receive the bonus arose." (Footnote 1)

In the situation where:

• a taxpayer is entitled to receive a bonus as of December 31 of Year 1 for services rendered during that year (the "Amount");
• the Amount is included by the employer in a reserve for a period of 3 years;
• each year, as at December 31, a certain factor, determined on the basis of the performance of the corporation employing the taxpayer, will be applied to the Amount, so that the latter will fluctuate, upwards or downwards, according to the future performance of the corporation until it is paid to the taxpayer;
• for commercial reasons, the factor to be applied to the Amount for a given year is known only on March 31 of the following year;
• in this example, it follows that the Amount to be paid to the taxpayer will be determinable only on March 31 of Year 5, when the corporation can then apply the factor as of December 31 of Year 4 and pay the Amount to the taxpayer.

Question to the CRA

Is such a plan excluded from the definition of SDA by virtue of paragraph (k) of that definition where the Amount is payable on December 31 of Year 4 but actually paid on March 31 of Year 5 since the amount to be paid is determinable (for commercial reasons) only on March 31 of Year 5?

CRA response

The CRA is of the view that the exception provided in paragraph (k) of the definition of SDA in subsection 248(1) would not be applicable in the situation described above because the plan provides that the Amount must be paid after the three-year period (i.e., in Year 5) following Year 1. Note that the English version of paragraph (k) of the SDA definition is clearer than the French version. The English version of paragraph (k) states: "to be paid within 3 years following the end of the year."

Robert Gagnon
(613) 670-9018
October 7, 2016
2016-065280

FOOTNOTES

Due to our systems requirements, the footnotes contained in the original document are reproduced below:

1 CANADA REVENUE AGENCY, Technical Interpretation 2003-0035115, December 3, 2003.