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 2001-007293
G. Kauppinen
May 15, 2001
Dear XXXXXXXXXX:
Re: Deferred Salary Leave Plan ("DSLP")
This is in reply to your e-mail of March 1, 2001 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")".
Paragraph XXXXXXXXXX
Revenue Canada (now the "Canada Customs and Revenue Agency") does not "authorize" Deferred Salary Leave Plans. It would be more accurate to say here that the Plan satisfies the requirements of paragraph 6801(a) of the Income Tax Regulations.
Paragraph XXXXXXXXXX
It should be added here that the "deferral period" "includes the years referred to in XXXXXXXXXX below".
Paragraph XXXXXXXXXX
Rather than "(Rev. Can.)" a more accurate authority would be ""(CCRA)" indicates a section of the Plan written in accordance with, or subject to, the Income Tax Act and Regulations".
Paragraph XXXXXXXXXX
To be more accurate the words "in a taxation year" should be added after the words "The amount deferred...".
Paragraph XXXXXXXXXX
The cross-reference to paragraph 6(11) of the Income Tax Act is incorrect and should be removed.
Paragraph XXXXXXXXXX
The second last sentence will not be correct if the leave period straddles December 31 since all interest accrued on deferred amounts must be paid at the end of each calendar year. We suggest that the words "Subject to XXXXXXXXXX above," precede the beginning of the last sentence.
Paragraphs XXXXXXXXXX
The references to "Revenue Canada" should be replaced by "the Income Tax Regulations".
Paragraph XXXXXXXXXX
The second sentence is misleading because all amounts paid out of the Plan, while it continues to be in compliance with the Regulations, are taxable in the year that they are paid. If the Leave of Absence is not taken immediately following the Deferral Period, the amounts deferred to that time will be immediately brought into income for tax purposes. The existing sentence parallels the wording in subparagraph 6801(a)(vi) which is applicable only when the Regulations continue to be complied with.
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.
Paragraph XXXXXXXXXX
Interest on the Deferred Amount is considered to be employment income and is taken into income for tax purposes at the end of each calendar year. Contributions to the Canada Pension Plan during the Deferral Period will be based on the actual (net) salary received plus the interest accrued on the deferred amount in each year and contributions during the Leave Period will be based on the actual amounts received plus the interest paid in respect of the outstanding Deferred Amount.
Paragraph XXXXXXXXXX
In the second sentence "Deferred Compensation" is not a defined term. The reference should be to "Deferred Amount and unpaid Accrued Interest" or "all amounts held under the Plan for the Participant's benefit".
To be more technically correct (i.e., if employment ceases less than 60 days before the year-end so that the payment could be in the next calendar year), the last sentence in this paragraph should read "The lump sum will be considered employment income in the year the Participant withdraws from the Plan although the actual payment of the Deferred Compensation may occur in the calendar year following the year of the withdrawal."
Paragraph XXXXXXXXXX
The provision for suspension from participation from the Plan will be technically correct as long as the Deferral Period, including any period of suspension, does not exceed 6 years. If an individual takes a 33 1/3% per year deferred amount with a scheduled leave for the 4th year then no suspension is possible if the year established for the Leave of Absence per the Memorandum of Agreement cannot be changed. However, an individual with a 3 year deferral period could be suspended from the plan for up to 3 years and still be in compliance with the Regulations (i.e., the total deferral period, including the years of suspension, can be up to 6 years). However, this would mean that the year established for the Leave of Absence would be pushed forward. Is the restriction on changing the year established for the Leave of Absence intentional?
We trust the foregoing comments are of assistance.
Yours truly,
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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