12 March 2003 External T.I. 2003-0003705 - DSLP-NOT RETURNING TO WORK

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 the result if an employee does not return to work following a period of leave under a DSLP?

Position:

Deferred amounts must be included in income at the point where all conditions of 6801(a) are not met.

Reasons: General discussion.

2003-000370
XXXXXXXXXX Renée Shields
(613) 948-5273
March 12, 2003

Dear XXXXXXXXXX:

Re: Deferred Salary Leave Plan ("DSLP")

This is in response to your letter of January 6, 2003 inquiring about the requirement that an employee on leave under a DSLP return to work following the period of leave.

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. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. 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.

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 a bona fide period of leave 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 the employee's income under subsection 6(11) of the Income Tax Act (the "Act") in the years in which the deferrals occurred because the plan would not satisfy the conditions required to qualify as a prescribed plan or arrangement.

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 under subsection 6(11) of the Act at that time and any deferrals made after that time would also be included in the employee's income under subsection 6(11) of the Act 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.

The determination of whether a particular participant in a DSLP originally intended to return to work at the time the arrangement was made or whether the particular participant made the decision not to return to work at a subsequent time is a question of fact.

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