20 January 2003 External T.I. 2002-0172895 - 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:

Does a proposed deferred salary leave plan comply with Regulation 6801(a)?

Position:

Not a ruling request. It would be a question of fact, based upon a review of all substantiating documents.

Reasons: General information and commentary provided.

2002-017289
XXXXXXXXXX Renée Shields
(613) 948-5273
January 20, 2003

Dear XXXXXXXXXX:

Re: Deferred Salary Leave Plan ("DSLP")

This is in response to your letter of August 20, 2002 requesting our review of the documents pertaining to your proposed DSLP to be offered to the employees of XXXXXXXXXX (the "Employer") to determine whether the proposed DSLP complies with the provisions of paragraph 6801(a) of the Income Tax Regulations (the "Regulations").

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

Our review of the provisions of the DSLP indicates that there are some deficiencies, which have to be amended to ensure that your DSLP complies with paragraph 6801(a) of the Regulations. We suggest that you consider our comments and that you refer to Advance Income Tax Ruling ATR-39, Deferred Salary Leave Plan.

We note that on page XXXXXXXXXX it is indicated that amounts withdrawn from the participants' regular pay during the deferral period shall be invested by the Employer and that the amount withdrawn plus accrued interest will be paid to the participant during the year of leave. We have two comments in this regard:

i) The DSLP merely indicates that the amounts withheld will be invested by the Employer. No details are provided. Please note that the manner in which the withdrawn salary amounts are held must satisfy either clause 6801(a)(iv)(A) or clause 6801(a)(iv)(B) of the Regulations. Specifically, the Plan must provide that the amounts withheld from the participants' salary under the arrangement are held either by a trust governed by an employee benefit plan as that term is defined at subsection 248(1) of the Act or in a deposit or similar arrangement for the benefit of the participant.

ii) Subparagraph 6801(a)(iv) of the Regulations also requires that the interest earned in a taxation year in respect of the withdrawn amounts must be paid to the participant in that year. These interest amounts will be considered employment income for the purposes of the Income Tax Act (the "Act") and would be reported on the employee's T4 supplementary and be subject to income tax withholdings. Our comments in this regard are also applicable to Item XXXXXXXXXX of the draft "Agreement - Self-funded Leave Plan".

Item XXXXXXXXXX permits employees to withdraw from the DSLP prior to taking a leave. The purpose of a DSLP is to enable employees to fund a leave of absence from work and not to permit deferral of tax on salary. Accordingly:

i) the DSLP must be explicit that it is not established to provide benefits to the employee on or after retirement and

ii) the DSLP must prohibit the employee from withdrawing from the plan at will. We have accepted plans that permit withdrawal under extenuating circumstances such as financial hardship, provided the employer is required to give consent. Further, the employer should ensure that the deferral period ends sufficiently in advance of any planned retirement by the employee. Otherwise, the plan might be utilized as an income-sheltering device where funds can be deposited free of tax and then withdrawn at any time and for any purpose. In the event of death or termination of employment, the arrangement should provide that participation in the plan is terminated.

Item XXXXXXXXXX refers to the death of an employee while participating in the DSLP. As noted in paragraphs 4.1 through 4.3 of ATR-39, in such a situation, the deferred amounts must be paid in a reasonable period of time.

Item XXXXXXXXXX refers to a prohibition on receipt of salary from the employer during the leave period. We note that subparagraph 6801(a)(iii) of the Regulations imposes a more extensive restriction. The plan must prohibit the receipt of salary or wages from the employer, or from any other person or partnership with whom the employer does not deal at arm's length. As indicated in your "Self-Funded Leave - Letter to Employee", the phrase "salary or wages" would not include payment of amounts by which the employee's salary was reduced during the deferral period and any reasonable fringe benefits that the employer would normally pay to or for the benefit of the employee.

Item XXXXXXXXXX allows the leave to be postponed for one year. Pursuant to subparagraph 6801(a)(i) of the Regulations the leave period must commence immediately after the deferral period. Accordingly, it should be quite explicit that a one-year postponement of leave results in another year of deferral and the applicable salary withdrawals.

We note that the proposed DSLP permits a maximum of a five year deferral period. With the additional 1-year extension permitted by Item XXXXXXXXXX this will bring the deferral period to six years. Please note that this is the maximum deferral period permitted under subparagraph 6801(a)(i) of the Regulations. The plan should contain a clear condition that under no circumstances will the deferral period exceed six years.

As noted above, subparagraph 6801(a)(i) of the Regulations requires that the DSLP specify that the leave period is to commence immediately after the deferral period. We note that this requirement has not been fully expressed in Item XXXXXXXXXX.

Item XXXXXXXXXX of the "Agreement - Self-Funded Leave Plan" makes reference to the requirement in subparagraph 6801(a)(v) of the Regulations that the employee return to his regular employment for a period not less than the period of the leave. This requirement must appear in the DSLP itself, not merely in a participant's acknowledgment. We note that on page XXXXXXXXXX under "Upon Return" indicates that the applicable provisions of the Collective Agreement regarding lay off and recall will apply. If it is readily apparent that the terms of the Collective Agreement will prevent participants from complying with subparagraph 6801(a)(v) of the Regulations, the plan will not qualify as a DSLP.

In order to comply with subparagraph 6801(a)(vi) of the Regulations, the plan should also contain wording that clearly requires the deferred salary amounts to be fully paid to the participant no later than the end of the first taxation year that commences after the end of the deferral period.

You have also requested that we provide you with information regarding Canada Pension Plan (CPP) matters and Employment Insurance (EI). It is the CCRA's position that CPP premiums are to be based on the employee's salary net of the deferred amounts during the period of deferral and on the deferred amounts when paid to the employee during the leave period.

If further information is required concerning the employer's responsibility with respect to CPP contributions or the preparation of T4s etc., the enquiry should be directed to:

Policy and Technical Services Section
CPP and EI Eligibility Division
Revenue Collections Directorate
Assessment and Collections
2nd floor, Tower "C"
25 McArthur Road
Ottawa ON K1A 0L5

It is also the CCRA's position that EI premiums are to be based on the employee's gross salary before deferrals during the period of deferral and no premiums are to be withheld from the deferred amounts when paid to the employee during the leave period.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch