23 August 2000 External T.I. 2000-0025835 - 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: Does a proposed deferred salary leave plan satisfy the requirements of Reg. 6801?

Position: Yes.

Reasons: Assumes suggested amendments adopted.

XXXXXXXXXX 			2000-002583
G. Kauppinen
Attention: XXXXXXXXXX 

August 23, 2000

Dear Sirs:

Re: Deferred Salary Leave Plan ("DSLP")

This is in reply to your facsimile transmission dated April 28, 2000 wherein you requested our comments regarding your draft DSLP (the "Plan") and the requirements of paragraph 6801(a) of the Income Tax Regulations ("Regulations").

We have reviewed your Plan and are of the opinion that it will be a prescribed plan under paragraph 6801(a) of the Regulations provided it is amended and\or administered as discussed below. Please note that these are only statements of opinion on the specifics of your proposed Plan and as such are not binding on the Canada Customs and Revenue Agency (the "CCRA")". Enclosed is a copy of ATR-39 (Deferred Salary Leave Plan) which describes a plan which complies with the requirements of the Regulations. Where applicable we will cite examples of acceptable wording in ATR-39 in our comments below.

Our Comments

Paragraphs XXXXXXXXXX, Appendix XXXXXXXXXX

Please note that all amounts that may reasonably be considered to have accrued on the deferred salary to or for the benefit of the employee to the end of a taxation year shall be paid in the year to the employee. Also, we consider such amounts to be employment income for purposes of the Income Tax Act (the "Act"). As such, these amounts must be reported on the employee's T4 supplementary and the usual income tax withholdings and remittances must be made. (ATR-39 - definition of "Deferred Compensation Amount", 2.3 and 7.3.)

Paragraph XXXXXXXXXX

The definition would be more accurate if it read: "(CCRA)" indicates a section of the Plan written in accordance with the Income Tax Act and Regulations and/or administrative policy of the Canada Customs and Revenue Agency.

Paragraph XXXXXXXXXX

Note that the income earned on deferred amounts must be paid out to the employee before the end of each taxation year (which is the calendar year). Therefore, an employee who is on a leave of absence from July 1 to June 30 of the next calendar year must be paid the income earned on the remaining deferred amounts on or before the January 1 included in the period of leave. (ATR-39 - 2.3.)

Paragraph XXXXXXXXXX

The leave of absence must commence immediately after the deferral period, and the deferral period may not exceed six years from the day deferrals commence. Therefore, vacation leave taken before the leave of absence must be included in the deferral period. (ATR-39 - 3.1 and 3.6.)

Paragraph XXXXXXXXXX

While on leave the employee is still "employed" by the College. The Regulations only require that during the leave the employee does not receive any salary or wages from the employer, or with any other person or partnership with whom the employer does not deal at arm's length other than the deferred amount and reasonable fringe benefits that the employer usually pays to or on behalf of employees.

Paragraph XXXXXXXXXX

This paragraph should be revised to replace "shall" with "may". To explain, if the employee commenced deferrals but from the inception of participation in the plan never intended to return to employment, the plan would fail to comply with the Regulations and the employee would be liable for taxes, interest and perhaps penalties on the amounts deferred for the year(s) the amounts were deferred. However, if the employee always intended to comply with the condition that the employee return to employment but through circumstances beyond his or her control was unable to do so, there would be no liability for taxes on the deferred amounts until the year it was known that the return to employment was impossible.

Paragraphs XXXXXXXXXX

These paragraphs do not comply with the Regulations. If the Plan provides for voluntary withdrawal, we consider that the Plan does not meet the requirements of subparagraph 6801(a) of the Regulations because the employee can, at any time, access the funds held in the Plan for his or her benefit. However, the Plan can provide for early withdrawal in circumstances where continued participation therein would cause financial hardship to the employee. (ATR-39 - 4.2.)

Additional Information

It is our position that Employment Insurance premiums are to be based on the Participant's gross salary before deferrals during the deferral period and no premiums are to be withheld from the deferred amounts when paid to the Participant during the leave period.

We trust the foregoing comments are of assistance.

Your truly,

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