10 February 2003 External T.I. 2002-0177955 - 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.

2002-017795
XXXXXXXXXX Renée Shields
(613) 948-5273
February 10, 2003

Dear XXXXXXXXXX:

Re: Deferred Salary Leave Plan ("DSLP")

This is in response to your letter of November 25, 2002 requesting our review of the documents pertaining to the 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 are of the opinion that provided the DSLP is amended as explained below, it will be a prescribed plan under paragraph 6801(a) of the Regulations.

Subparagraph 6801(a)(i) of the Regulations requires a DSLP to provide that the period of leave will commence immediately after the deferral period. Subsection XXXXXXXXXX of the DSLP provides that the leave may only be taken at the conclusion of the deferral period, which wording is not specific enough to comply with subparagraph 6801(a)(i) of the Regulations.

Subparagraph 6801(a)(i) of the Regulations also provides that the deferral period cannot exceed six years. We note that subsection XXXXXXXXXX of the DSLP provides for a maximum deferral period of XXXXXXXXXX years. Section XXXXXXXXXX allows for the leave period to be postponed for a maximum of XXXXXXXXXX additional years. It should be specified that such a postponement constitutes an additional period of salary deferral. Only in this way will the DSLP meet the above-mentioned requirement of subparagraph 6801(a)(i) that the period of leave commence immediately after the deferral period.

Subparagraph 6801(a)(iii) of the Regulations requires a DSLP to provide that during the leave period, the employee cannot receive salary or wages from the Employer or from any other person or partnership with whom the Employer does not deal at arm's length. The DSLP does not contain a provision to this effect and must be amended in this respect. We note that pursuant to clauses 6801(a)(iii)(A) and 6801(a)(iii)(B) of the Regulations, this prohibition does not extend to receipt of salary or wages deferred, or reasonable fringe benefits that the Employer usually pays to or for the benefit of the employee. As section XXXXXXXXXX of the DSLP provides for the continuation of reasonable fringe benefits, it does not violate subparagraph 6801(a)(iii).

Subparagraph 6801(a)(iv) of the Regulations provides how deferred amounts under a DSLP are to be held. Either the amounts should be held in a trust governed by an employee benefit plan (EBP Trust) pursuant to clause 6801(a)(iv)(A) of the Regulations or be held by or for the account of someone other than an EBP trust pursuant to clause 6801(a)(iv)(B) of the Regulations. Subsection XXXXXXXXXX of the DSLP indicates that the deferred amounts will be deposited in trust, in the employee's name, in a recognized financial institution. It is not clear that an EBP Trust has been established such as would satisfy clause 6801(a)(iv)(A) of the Regulations. Furthermore, by depositing the amounts into an account in the employee's name, it is likely that all amounts paid by the Employer to such an account would be considered to be paid to the employee and would have to be reported as income from employment in that year.

We would therefore recommend that subsection XXXXXXXXXX of the DSLP be revised to ensure compliance with subparagraph 6801(a)(iv) of the Regulations. For example, it is quite common for an employer to deposit deferred amounts into a separate account in the employer's name, with amounts earmarked for the benefit of the particular employee. Such an arrangement would satisfy clause 6801(a)(iv)(B) of the Regulations.

Subparagraph 6801(a)(v) of the Regulations requires a DSLP to provide that an employee must return to regular employment with the Employer or an employer that participates in the same or a similar arrangement for a period that is not less than the leave period. Section XXXXXXXXXX of the DSLP only partially addresses this requirement. It is necessary to include wording that requires the employee to return for a period that is not less than the leave period.

With respect to subparagraph 6801(a)(v) of the Regulations, we also wish to point out that where unforeseen circumstances occur during the leave period and the Employer is unable to fulfill its commitment; e.g., it becomes necessary to lay off the employee after the leave period due to economic circumstances, the CCRA will normally not reassess to deny the deferral of tax otherwise available by virtue of the DSLP. On the other hand, if it becomes evident during the deferral period that the employee will be laid off before the commitments under the DSLP can be fulfilled, we would expect the arrangement to be terminated at that time with the usual tax consequences for such termination.

Subparagraph 6801(a)(vi) of the Regulations requires a DSLP to provide that subject to the requirement that earnings on deferred amounts be paid to the employee in the taxation year of accrual, all amounts held for the employee's benefit will be paid to the employee no later than the end of the first taxation year that commences after the end of the deferral period. Subsections XXXXXXXXXX of the DSLP appear to address this requirement. To avoid any misunderstanding however, it should be clear in subsection XXXXXXXXXX of the DSLP that payments of interest or earnings are to be made in accordance with subsection XXXXXXXXXX and not in accordance with subsection XXXXXXXXXX.

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