17 October 2000 External T.I. 2000-0041545 - DSLP

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 their proposed deferred salary leave plan satisfy the conditions described in paragraph 6801(a) of the Regulations?

Position: No.

Reasons: Certain conditions in paragraph 6801(a) are not satisfied.

XXXXXXXXXX 2000-004154
M. P. Sarazin
Attention: XXXXXXXXXX

October 17, 2000

Dear Sirs:

Re: Deferred Salary Leave Plan

This is in reply to your letter of August 10, 2000, requesting our comments on whether your proposed deferred salary leave plan ("DSLP") to be offered to administrative, teaching and support staff of the XXXXXXXXXX complies with the provisions of paragraph 6801(a) of the Income Tax Regulations (the "Regulations").

Comments

In your letter and in XXXXXXXXXX of the DSLP there is a reference to a "ruling". Please note that it is not necessary to obtain an advance income tax ruling or other form of approval from the Canada Customs and Revenue Agency (the "Agency") in order to implement a deferred salary leave plan under which the amount of income tax to be deducted is computed on the actual salary received. You may satisfy yourself that the plan complies with the requirements of the Income Tax Act and the Regulations. Note that the following comments do not constitute a ruling which binds the Agency.

Our review of the provisions of the DSLP indicates that there are some deficiencies which should be amended to ensure that the DSLP complies with the Regulations. We suggest that you consider our comments and that you refer to the enclosed copy of Income Tax Ruling ATR-39 (references to sample wording in ATR-39 follow each comment if available).

1. Based on the terms of the DSLP, it must be reasonable to conclude that the arrangement is not established to provide benefits to the employee on or after retirement but is established for the main purpose of permitting the employee to fund a leave of absence. Even though paragraph XXXXXXXXXX of the DSLP states that the leave is not to be established to provide benefits to participants on or after retirement, the provisions of paragraph XXXXXXXXXX would not prevent a participant from deferring salary and withdrawing from the plan immediately before retirement. Generally, the terms of the plan should not allow a participant to withdraw from the DSLP without the permission of the employer and this permission will only be granted under extenuating circumstances. (ATR-39, 4.2)

2. Paragraph XXXXXXXXXX of the DSLP states that the employer will make reasonable efforts to place the participant, upon return from leave, into a position no less favourable than held prior to the leave. In order to comply with paragraph 6801(a) of the Regulations, the DSLP must provide that the participant is to return to his or her regular employment with the employer or an employer that participates in the same or similar arrangement after the period of leave for a period that is not less than the period of the leave of absence. (ATR-39, 6.1) In our view, the current provisions of the DSLP does not make it clear that a participant is required to return to his or her regular employment.

3. Paragraph XXXXXXXXXX of the DSLP states that the participant may defer a percentage of his or her salary for a maximum of five years, paragraph XXXXXXXXXX provides the employer with the right to postpone the leave of absence for one year and paragraph XXXXXXXXXX provides the participant with the right to postpone the leave of absence for one year. In order to comply with paragraph 6801(a) of the Regulations, the DSLP must provide that the deferral period not exceed 6 years after the date on which the deferrals for the leave of absence commence. (ATR-39, 3.1, 3.4 and 3.5) In our view, the current provisions of the DSLP does not make it clear that the maximum deferral period is 6 years.

4. In order to comply with paragraph 6801(a) of the Regulations, the DSLP must provide that throughout the period of the leave of absence the participant does not receive any salary or wages from the employer, or from any other person or partnership with whom the employer does not deal at arm's length, other than the deferred amounts and any reasonable fringe benefits. In our view, the current provisions of the DSLP should be amended to make this very clear to the participants.

We note that all of these conditions have to be satisfied within the terms of the DSLP before the plan or arrangement will qualify as a deferred salary leave plan for purposes of paragraph 6801(a) of the Regulations. Should you still wish to obtain an advance income tax ruling, please refer to the enclosed Information Circular 70-6R3 (Advance Income Tax Rulings) and submit your request in the form described therein. Please note that the fee for an advance income tax ruling was increased on August 1, 2000, to $100 for each of the first 10 hours and $155 for each additional hour. An advance of the fee for the first five hours plus GST in the amount of $535 must accompany your request.

We trust the above comments will be of assistance to you.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate

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