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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issue: [TaxInterpretations translation]
If a taxpayer does not take the leave provided for under a deferred salary leave plan, when must the deferred amounts be included in calculating the taxpayer's income?
Position:
If the agreement satisfied the conditions of paragraph 6801(a) of the Regulations at the time it was entered into, the deferred amounts would be taxable in the year in which it is known that the conditions of the agreement will not be satisfied.
Reason:
Text of the Act.
May 8, 2002
XXXXXXXXXX Tax Services Office Headquarters
Financial Industries Division
Attention: XXXXXXXXXX
L. J. Roy, CGA
2002-013573
Deferred Salary Leave Plan
This is further to your fax of April 22, 2002, in which you asked us when amounts deferred pursuant to a deferred salary leave plan will be included in computing the taxpayer's income. You presented the following situation.
A taxpayer joined a deferred salary leave plan pursuant to which the deferral period was from September 1, 1994 to September 1, 1997 and the leave was to be taken from September 1, 1997 to September 1, 1998. However, the employee received salary insurance from April 17, 1995 to April 8, 1996 and no amounts were deferred during this period. The employer deferred amounts of the employee's salary during the period from September 1, 1994 to April 16, 1995 and from April 9, 1996 to September 1, 1998. The leave was postponed to an unspecified later date and was never taken. In addition, the employer and employee had forgotten about the amounts thus deferred. In 2002, the employer plans to pay the employee the amounts deferred over a 3-year period.
OUR COMMENTS:
A deferred salary leave plan that meets all the conditions set out in paragraph 6801(a) of the Income Tax Regulations ("the Regulations") at the time it is established is not considered to be a "salary deferral arrangement", within the meaning given to that expression in subsection 248(1) of the Income Tax Act (the "Act"). Amounts deferred pursuant to such a plan are included in the taxpayer's computation in the year they are received.
Subparagraph 6801(a)(i) of the Regulations provides, among other things, that the leave must commence immediately after the deferral period and the deferral period must not exceed six (6) years from the date on which it began. The Agency allows the deferral period to be extended from the date previously agreed, as long as it does not exceed six (6) years in total. In addition, pursuant to subparagraph 6801(a)(vi) of the Regulation, the plan must provide that all amounts held pursuant to the plan be paid to the employee no later than the end of the first taxation year beginning after the end of the sixth year of the deferral period.
In the situation where an agreement pursuant to a deferred sabbatical leave plan meets all of the conditions set out in subparagraph 6801(a) of the Regulations but the employer or employee subsequently fails to satisfy them, it is our view that the agreement would cease to meet the conditions at that time and the employee's participation in the plan would cease. These conditions include the requirement that the leave begin immediately after the deferral period, which must not exceed six years from the date on which the deferral period began. In such circumstances, the deferred amounts would be taxable in the year in which it is known that the conditions of the agreement have not been satisfied.
Please note that subparagraph 6801(a)(vi) of the Regulations does not allow the inclusion of deferred amounts to be extended where the leave has not commenced within the maximum period allowed pursuant to subparagraph 6801(a)(i) of the Regulations. The purpose of this subparagraph is to ensure that deferred amounts cannot be paid over a period exceeding one year, which could be the case for a leave exceeding one year.
In the situation you have submitted, unless the employee had previously decided not to take leave or the agreement did not allow the deferral period to be extended, we are of the view that the agreement would have ended no later than September 2000, i.e., at the time when it could be seen that the leave would not be taken. The agreement would therefore be subject to the rules governing salary deferral arrangements, since the deferred amounts were not paid to the employee. Consequently, the deferred amounts would be included in computing the taxpayer's income for the 2000 taxation year pursuant to subsection 6(11) and paragraph 6(1)(a) of the Act. If you determine that the agreement terminated before the 2000 year under one of the above situations, the deferred amounts would be included in computing the taxpayer's income in that year.
In the event that the requirements of 6801(a) of the Regulations were not satisfied at the time the agreement was entered into, it is our view that the agreement constituted a salary deferral arrangement. If so, the deferred amounts had to be included in computing the taxpayer's income in the year in which they were deferred, pursuant to subsection 6(11) and paragraph 6(1)(a) of the Act. In addition, paragraph 6(1)(i) of the Act provides for the inclusion of amounts received in a year pursuant to a salary deferral arrangement that exceed the deferred amounts already included pursuant to paragraph 6(1)(a) of the Act.
ACCESS TO INFORMATION
For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the CRA library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
Manager
Financing and Plans Section
Financial Industries Division
Income Tax Rulings Directorate
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