30 October 2002 External T.I. 2002-0154615 - 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 CCRA.

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

Principal Issues:

What is CCRA's position concerning an employee participating in a DSLP who becomes disabled and cannot return to work after the employees' leave of absence?

Position:

At the time it is definitely determined that an employee will not be returning to work, due to a disability, any deferred amounts not previously paid out of the plan, e.g., during the leave of absence, must be paid to the employee and included in the employee's income at that time.

Reasons: Our position, reflected in previous documents.

XXXXXXXXXX 						2002-015461
G. Allen
October 30, 2002

Dear XXXXXXXXXX:

Re: Deferred Salary Leave Plan ("DSLP")

This is in reply to your letter dated July 22, 2002 concerning an employee participating in a DSLP who may not be able to return to work after their leave of absence due to a disability.

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 tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. 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.

Subparagraph 6801(a)(v) of the Income Tax Regulations (the "Regulations") requires a DSLP to provide that an employee will return to work after the leave of absence for a period that is not less than the period of the leave of absence. The purpose of this provision is to ensure that a period of leave of absence from employment is followed by a return to work and not by a subsequent retirement. Consequently, if at the time the arrangement is made, the employee does not intend to return to work, any amounts deferred under the plan would be included in income in the years in which the deferrals occurred.

On the other hand, where an arrangement meets the provisions of the Regulations at the time it is established, but, at some later time, either the employee or the employer does not abide by the provisions, then it may be appropriate to conclude that the arrangement has ceased to meet the requirements of the Regulations at that point in time. In this case, the amount held for the benefit of the employee must be included in the employee's income at that time and any deferrals made after that time must be included in the employee's income in the year in which the deferrals are made. Generally, the employer should terminate the arrangement and pay all remaining funds held for the benefit of the employee to him or her, less any applicable withholding tax.

Until it is definitively known that an employee will not be returning to work after a leave of absence, no inclusion of amounts deferred under the DSLP will be required. However, if it is determined that an employee will definitely not be returning to work after their leave of absence, due to the fact that they have become disabled, the employee will be considered to have terminated their participation in the DSLP and all deferred amounts not previously paid out under the DSLP will be included in the employees' income for tax purposes at that time. Where it is determined after the leave of absence has been completed and all deferred amounts have been paid to the employee during the leave of absence that the employee will not be returning to work because the employee has become disabled, the DSLP will be considered terminated and there would not be any further tax consequences to the employee.

We trust that our comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate