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 paragraph 6801(a) of the Regulations?
Position: This submission was not made as an Advance Income Tax Ruling request. Compliance with paragraph 6801(a) would be a question of fact, based upon a review of all substantiating documentation.
Reasons: General information and commentary provided.
2003-005013
XXXXXXXXXX Renée Shields
(613) 948-5273
January 29, 2004
Dear XXXXXXXXXX:
Re: Deferred Salary Leave Plan ("DSLP")
This is in response to your letter of November 19, 2003 requesting our review of the description of the terms of a proposed DLSP to be offered to 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. 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 Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.
Our review of the description of the DSLP provisions indicates that there are some deficiencies that should be rectified in order to ensure that your DSLP complies with paragraph 6801(a) of the Regulations. Although a DSLP does not have to be approved by the CRA, we suggest you consider our comments and that you refer to Advance Income Tax Ruling ATR-39, "Deferred Salary Leave Plan" as an example of a DSLP that complies with the Regulations.
Paragraph 6801(a) of the Regulations requires that there be an arrangement in writing between an employer and its employee(s). Your submission consists of an extract from the Employer's Policy Manual on the subject of DSLPs. Although the existence of an agreement is a question of fact, this document in and of itself would likely not satisfy this condition, as it is likely not an arrangement between the Employer and the employee. The Policy Manual extract references certain attachments that were not provided to us. One such attachment is entitled "XXXXXXXXXX". If this document contains the terms of the arrangement, it may be that it would satisfy the requirement that there be an arrangement in writing between the parties.
i) The purpose of a DSLP is to enable an employee to fund a leave of absence from work as opposed to permitting a deferral of tax on salary. Even if this general purpose is stated, we generally also recommend that in order to ensure compliance with subparagraph 6801(a)(i) of the Regulations, the DSLP explicitly state that the plan has not been established to provide benefits to the employee on or after retirement.
ii) A DSLP leave of absence may be for the purpose of full-time attendance at a designated educational institution as defined in subsection 118.6(1) of the Act for purposes of the education tax credit. The description submitted to us merely makes reference to full-time attendance at an educational institution. We caution that the educational institutions that qualify are those that satisfy the definition in subsection 118.6(1) of the Act and recommend making the DSLP specific in this regard.
iii) A DSLP leave of absence for reasons other than full-time attendance at a designated educational institution must be for a minimum period of six consecutive months. Although referencing a six-month minimum, the description submitted to us does not require that these months be consecutive.
iv) The DSLP description states that the deferral period may not exceed six years. We suggest that in order to ensure compliance with paragraph 6801(a) of the Regulations, this wording be revised to state that the leave period must commence no later than six years after the commencement of the deferral period.
v) Subparagraph 6801(a)(i) of the Regulations also requires that the leave commence immediately after the deferral period. This requirement is not reflected in the documentation provided for our review.
vi) Subparagraph 6801(a)(iii) of the Regulations provides that during the leave period, the employee cannot 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 deferred salary. Although not affecting its compliance with the DSLP rules, we note, simply as an aside, that your plan is significantly more restrictive than the Regulations insofar as it prohibits the receipt of wages from the Employer or any other organization.
vii) Subparagraph 6801(a)(iv) of the Regulations requires that the arrangement provide how the deferred salary amounts will be held during the deferral period. 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. The documentation submitted to us is silent in this regard and therefore requires clarification.
viii) The foregoing provisions of the Regulations also require that interest earned on an employee's deferred salary in a year be paid to that employee in the year earned. The documentation submitted to us is not explicit in this regard. These interest amounts are to be treated as employment income subject to the usual tax withholdings and remittances and when received, should be included on the employee's T4 Supplementary.
ix) In connection with the foregoing comment, we note that paragraph XXXXXXXXXX of the Procedure section of the Policy Manual extract submitted to us refers to the "salary accrual period" in discussing interest but the Definition section in the same document refers to the "deferral period." You may wish to provide some consistency with these terms.
x) We note that paragraph XXXXXXXXXX of the Procedure section of the Policy Manual extract indicates that statutory deductions will be made as the deferred salary is paid to the employee during the leave period. It is correct that income tax and Canada Pension Plan premiums should be withheld from these amounts. However, it is our position that employment insurance ("EI") premiums are to be based on the employee's gross salary before deferrals during the deferral period and therefore no EI premiums would be withheld from the amounts paid to the employee during the leave period.
We trust that these comments will be of assistance.
Yours truly,
Roxane Brazeau-LeBlond, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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