CRA indicates that it generally will not backdate loss of DSLP status if the employer terminates and cashes out the arrangement within 60 days of it ceasing to comply
Reg. 6801(a)(v) requires the terms of a qualifying deferred salary leave plan (“DSLP”) must provide for the employee to return to regular employment after the DSLP leave of absence for a period of not less than the leave period - so that it is impermissible for the employee to retire immediately following the leave. CRA indicated:
- If it was evident that an employee had entered into the arrangement with an intention to immediately retire following the leave, then the arrangement would never have qualified as a DSLP and CRA, on this view of matters, would assess on the basis that no salary had been deferred at all under the purported DSLP.
- Conversely, if the arrangement initially met the DSLP conditions but, later, the employee or employer ceased to abide by the conditions, the employer would be required to terminate the arrangement and pay all deferred amounts plus any unpaid interest under the arrangement (less source deductions) to the employee within a reasonable period of time (thereby resulting in an employment income inclusion to the employee in that year).
- CRA generally “would consider 60 days to be a reasonable period of time for the employer to terminate the arrangement and pay the amounts to the employee.”
- If the payment was not made within a reasonable period of time, the arrangement would become subject to the salary deferral arrangement rules in the taxation year when it first became known that the arrangement no longer satisfies the DSLP rules, resulting in employment income inclusions for that year.
Neal Armstrong. Summary of 14 June 2021 External T.I. 2021-0896151E5 under Reg. 6801(a)(v).