25 October 2001 External T.I. 2001-0098205 - DSLP - UNPAID LEAVE OF ABSENCE

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Would the conditions in 6801(a)(v) be satisfied if the employee takes an unpaid leave of absence for the balance of the return period and was given credit for the time under the pension plan.

Position: No

Reasons: The provision requires that the participant return to his or her regular employment with the employer or another employer that participates in the same or similar arrangement for a period that is not less than the period of leave. An unpaid leave would not satisfy this condition.

XXXXXXXXXX 							2001- 009820
M. P. Baldwin, CA
October 25, 2001 

Dear XXXXXXXXXX:

Re: Deferred Salary Leave Plan

This is in reply to your letter of July 9, 2001 sent to the Registered Plans Directorate, which was forwarded to our Directorate, in which you request information on a Deferred Salary Leave Plan ("DSLP"). Your question deals with a situation where a pension plan has a provision whereby teachers can go on an approved leave of absence without pay for up to two years and make the required contributions to the pension plan and receive credit for the period. The question has arisen as to whether the first year of such leave can count as the year of "return to work" required under the deferred salary leave rules.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. For more information concerning advance income rulings, please refer to Information Circular 70-6R4 dated January 29, 2001. Copies of information circulars are available at your local Tax Services Office or on the Internet at http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments, which may be of assistance.

Paragraph 6801(a) of the Income Tax Regulations (the "Regulations") sets out the rules governing DSLPs. Subparagraph 6801(a)(v) of the Regulations, in particular, requires that the plan provide that "the employee is to return to his regular employment with the employer or an employer that participates in the same or a similar arrangement after the leave of absence for a period that is not less than the period of the leave of absence".

The February 4, 1988 Regulatory Impact Analysis Statement describing the condition in subparagraph 6801(a)(v) states that the employee must return to his or her regular employment with the employer after the period of leave. The purpose of the provision, in general, contemplates a period of leave of absence from work, followed by a return to work and not a subsequent retirement or absence from work. Consequently, even though an employee may be considered employed when they are on unpaid leave, we would not consider such unpaid leave to be a return to regular employment as required under subparagraph 6801(a)(v) of the Regulations. In our view, a proposal to combine a DSLP with the utilization of unpaid leave entitlements violates the intent of paragraph 6801(a) of the Regulations because the employee does not intend to return to his or her regular employment.

Where an arrangement met the provisions of paragraph 6801(a) of the Regulations, and it is reasonable to assume that after the time the arrangement is entered into, that either or both parties cannot abide by the provisions, then the arrangement between the employer and the employee will fail to meet the requirements of the Income Tax Act (the "Act") to be a prescribed plan. Consequently, the employer should terminate the arrangement and all deferred amounts plus unpaid interest, if any, should be paid to the employee less applicable withholding tax, and included in his/her income for the year. There is no additional penalty imposed by the Act in these circumstances.

If the arrangement is not terminated, it would be subject to the salary deferral arrangement rules in the taxation year it is known that conditions cannot be satisfied and the accumulated amount in the arrangement (deferred amounts and unpaid interest) would be taxable employment income in that year. In addition, any further amounts that are deferred and any interest accrued after the time the arrangement becomes a salary deferral arrangement are taxable in the taxation year of the deferral.

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

Yours truly,

Roberta Albert
for Director
Financial Industries Division
Income Tax Rulings Directorate

c.c. Ms. Patricia Spice, Registered Plans Directorate