8 July 2003 External T.I. 2003-0016045 - 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:

Can an employee teach a course and be paid for teaching the course from her employer while she is on leave under a DSLP.

Position: No

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

XXXXXXXXXX 						2003-001604
M. P. Baldwin, CA

July 8, 2003

Dear XXXXXXXXXX:

Re: Deferred Salary Leave Plans ("DSLP")

This is in reply to your letter of April 29, 2003 requesting a technical interpretation on subparagraph 6801(a)(iii) of the Income Tax Regulations (the "Regulations"). In particular, you would like to know if a particular situation would be permitted under subparagraph 6801(a)(iii) of the Regulations.

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 Regulations sets out the rules governing DSLPs. Pursuant to subparagraph 6801(a)(iii) of the Regulations, the DSLP must provide that throughout the leave of absence the employee does not receive any salary or wages from the employer, or from any other person or partnership with whom the employer does not deal at arm's length, other than the deferral amounts and reasonable fringe benefits the employer usually pays.

In our opinion, any arrangement which would allow an employee to receive any salary or wages from their employer for services performed during the period that the employee is on leave pursuant to an DSLP would be in contravention of subparagraph 6801(a)(iii) of the Regulations. Consequently, the hypothetical fact situation described in your letter where a full-time teacher teaches three courses while she is on leave and is paid for teaching these courses by her employer, would be a violation of subparagraph 6801(a)(iii) of the Regulations.

Where an arrangement met the provisions of paragraph 6801(a) of the Regulations, and it is reasonable to assume that after the time the arrangement is entered into, that either or both parties cannot abide by the provisions, then the arrangement between the employer and the employee will fail to meet the requirements of the Act to be a prescribed plan. Consequently, the employer should terminate the arrangement and all deferred amounts plus unpaid interest, if any, should be paid to the employee less any applicable withholding tax, and included in his/her income for the year. There is no additional penalty imposed by the Act in these circumstances.

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 (deferred amounts and unpaid interest) 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.

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