22 July 2003 External T.I. 2003-0014495 - 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:

Under a DSLP, after an employee has been on leave for 1 year, can the employee only return to work for a couple of months and then retire?

Position: No

Reasons: It contravenes the provisions of 6801(a)(v) of the Regulations

XXXXXXXXXX 								2003-001449
R. Albert, CA
July 22, 2003

Dear XXXXXXXXXX:

Re: Leave of Absence followed by Retirement
Deferred Salary Leave Plans ("DSLP")

This is in reply to your letter of February 5, 2003 requesting technical interpretations regarding two possible scenarios concerning a one-year leave of absence followed by a proposed two-month return to work, and then retirement. The first scenario involves a DSLP where an employee has worked for four years preceding the one-year leave of absence and receives 80% of his or her salary in each of the five years involved. In the second scenario, the employee receives 100% of salary in each of four working years and then takes a one-year leave of absence without pay.

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 and other publications are available at your local Tax Services Offices 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.

A DSLP is a plan or arrangement that permits an employee to fund, through salary deferrals, a leave of absence from his or her employment. Generally, salary deferrals are included in income on an accrual basis pursuant to the salary deferral arrangement ("SDA") provisions in the Income Tax Act (the "Act") notwithstanding that the cash may only be received in a subsequent year. However, there is an exclusion from these rules for DSLPs. In these cases, the salary deferrals are in fact taxed when received, and not when earned.

Paragraph 6801(a) of the Income Tax Regulations (the "Regulations") sets out the rules governing DSLPs. Subparagraph 6801(a)(v) of the Regulations requires a DSLP to provide that an "employee is to return to his regular employment with the employer or an employer that participates in the same or a similar arrangement 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 for a period of time at least equivalent to the leave of absence, any amounts deferred under the plan would be included in income in the years in which the deferrals occurred. In our view, these comments apply to the first scenario noted above.

On the other hand, it should also be noted that 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. Generally, when this happens, 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. If the arrangement is not terminated, it would be subject to the SDA rules in the taxation year it is known that conditions cannot be satisfied and the accumulated amount in the arrangement would be taxable employment income in that year. In addition, any further amounts that are deferred and any interest accrued after the time the arrangement becomes an SDA are taxable in the year of deferral.

You have asked for copies of rulings that may be of assistance in clarifying the DSLP provisions. In this respect, we have included a copy of ATR-39.

The second scenario does not involve an SDA nor a DSLP. It involves a self-funded leave of absence where an employee receives full salary for four years followed by a one-year unpaid leave of absence. The employee would have to support themselves during the year off with personal savings, presumably saved during the previous four working years. In this scenario, the employee should include in income from employment all amounts received in the year of receipt. Considering only the simply scenario noted herein, employment income to report in the unpaid year of absence will be nil. There is no requirement in the Act or Regulations for the employee in this scenario to return to work for any particular length of time after the leave of absence before retiring.

We trust that the above comments will be of assistance to you.

Yours truly,

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