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.
Principal Issues: Whether the plan satisfies the requirements of a prescribed plan under 6801(a) so as not to be considered a salary deferral arrangement under 248(1).
Position: Yes.
Reasons: As per our review of the plan, all of the conditions of 6801(a) are met.
XXXXXXXXXX 2003-005093
XXXXXXXXXX
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Employer") (XXXXXXXXXX)
This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the Employer.
We understand that, to the best of your knowledge and that of the Employer, none of the issues involved in the ruling request is:
(i) in an earlier return of the Employer or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Employer or a related person,
(iii) under objection by the Employer or a related person,
(iv) before the courts or,
(v) the subject of a ruling previously issued by the Directorate to the Employer or a related person;
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed Plan and the purpose of the proposed Plan is as follows:
Facts
1. The Employer is a tax-exempt entity. Its mailing address is XXXXXXXXXX and is served by the XXXXXXXXXX Tax Services Office and by the XXXXXXXXXX Taxation Centre.
2. The Employer has agreed to establish a self-funded leave program (the SFLP) for its employees.
3. The Employer contributes to a defined contribution pension plan (the Pension Plan) on behalf of its employees at the yearly rate of XXXXXXXXXX % of gross earnings.
Proposed Plan
4. Upon receipt of a favourable advance tax ruling, the Employer will implement the SFLP. Applications for the SFLP will be accepted only from employees with at least XXXXXXXXXX years of continuous employment with the Employer. Applications will be considered by the Employer's senior management team and written acceptance or denial of the application will be communicated to the employee at least XXXXXXXXXX months before the anticipated effective starting date. Every employee who is accepted in the SFLP (the "Participant") will be required to sign a document which outlines the terms and conditions of the agreement.
5. The SFLP will provide Participants with the opportunity to enter into an agreement with the Employer to defer a specified percentage of annual salary (the Deferred Salary") during either a XXXXXXXXXX-year or XXXXXXXXXX-year period (the "Deferral Period") in order to take a one-year self-funded leave of absence (the "Leave Period") commencing immediately after the Deferral Period.
6. During the Deferral Period, the Participant shall agree to be paid the following percentage of the salary that would normally be paid in each of these years under the current collective agreement between the Employer and its employees:
XXXXXXXXXX year plan (XXXXXXXXXX-year deferral period, year XXXXXXXXXX leave) XXXXXXXXXX%; or
XXXXXXXXXX year plan (XXXXXXXXXX-year deferral period, year XXXXXXXXXX leave) XXXXXXXXXX%
7. The Deferred Salary shall be paid to the Participant during the Leave Period. Income tax will be deducted at source from the amount of salary paid to the Participant during each year of the Deferral Period and Leave Period, in accordance with the Income Tax Regulations in effect at that time.
8. During the Deferral Period and the Leave Period, employee benefits (medical, dental, life, etc.) shall be maintained at a level as if the Participant were being paid at 100% salary. Premium costs during the Leave Period will be paid in full by the Participant. These premiums will be deducted from each pay. Participants have the ability to withdraw from the Long-Term Disability Plan during the Leave Period.
9. The Employer will contribute to the Pension Plan during the Deferral Period on the basis of the Participant's annual salary before any deferral.
10. The Deferred Salary shall be invested by the Employer in an interest-bearing account at the Employer's banking institution in trust for the Participant.
11. Any interest or other additional amounts that may reasonably be considered to have accrued for the benefit of a Participant to the end of a taxation year (calendar year) shall be paid in that year to the Participant. Such amounts paid to the Participant will be considered employment income for the purposes of the Act and will be reported on the Participant's T4 supplementary and shall be subject to tax withholdings.
12. Canada Pension Plan (CPP) premiums will be based on the Participant's salary net of the Deferred Salary during the Deferral Period and on the Deferred Salary during the Leave Period. During the Deferral Period, Employment Insurance (EI) premiums will be based on the gross salary before deferrals. No EI premiums will be withheld during the Leave Period.
13. The Leave Period will commence immediately after the Deferral Period. Under no circumstances will the Deferral Period exceed six years.
14. The Deferred Salary will be fully paid to the Participant no later than the end of the first taxation year that commences after the end of the Deferral Period. Such amounts paid to the Participant will be considered employment income for the purposes of the Act and will be reported on the Participant's T4 supplementary and shall be subject to tax withholdings.
15. The Participant will receive no salary or wages from the Employer or any other person or partnership with whom the Employer does not deal with at arm's length during the Leave Period, other than payment of the Deferred Salary and the statutory benefits that the Employer would normally pay to, or on behalf of, the Participant.
16. Withdrawal from the SFLP at the option of the Participant will be permitted only by reason of extenuating circumstances and on approval of the Employer. "Extenuating circumstances," means those circumstances, including such things as illness and change in family circumstances that would result in financial hardship to the Participant. Such withdrawal will be granted by the Employer unless the Employer has reasonable grounds to believe the request to withdraw is capricious or is not based on bona fide extenuating circumstances. Upon withdrawal, any accumulated funds plus interest owed shall be repaid to the Participant within XXXXXXXXXX days of the notification of the approval to withdraw.
17. Should a Participant be terminated or die while participating in the SFLP, participation in the SFLP is terminated and any money accumulated, plus interest earned to the date of payment, shall be paid to the Participant or his or her estate, as the case may be, within a reasonable period of time.
18. Upon completion of the Leave Period, the Participant will return to his or her regular employment with the Employer for a period of time at least equal to the Leave Period. If for any reason the Participant must postpone the leave, any planned retirement by the Participant would be sufficiently postponed to allow the Participant to return to his or her regular employment with the Employer for a period of time at least equal to the Leave Period.
19. The Participant shall return to his/her position if it exists, or if it no longer exists, to the position a returning employee would otherwise be entitled under the provisions of the current collective agreement between the Employer and its employees.
20. Seniority is credited on the basis of the number of hours worked. While there will be no seniority accruing during the Leave Period, the seniority will be maintained at the level it was prior to the Leave Period.
21. During the Leave Period, Participants will not accumulate or be eligible for sick leave.
Purpose of the Proposed Plan
22. The Employer has agreed to implement a SFLP subject to the granting of a favorable advance tax ruling. The purpose of the proposed SFLP is to allow employees to defer a specified percentage of annual salary to fund a 12-month leave of absence; it is not to permit deferral of tax on salary nor is it established to provide benefits to an employee on or after retirement.
Ruling Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed Plan and purpose of the proposed Plan, we rule as follows:
A. The SFLP satisfies the requirements of paragraph 6801(a) of the Income Tax Regulations and will therefore be excluded from the definition of "salary deferral arrangement" as that term is defined in subsection 248(1) of the Act.
The above advance income tax ruling, which is based on the Act and Regulations in their present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and is binding on the Canada Customs and Revenue Agency provided that the proposed transfer is completed by XXXXXXXXXX.
Nothing in this letter should be construed as implying that the Canada Revenue Agency ("CRA") is giving any assurance on the issue of whether or not for the purposes of the Employer's Pension Plan, the prescribed compensation rules of section 8500 of the Income Tax Regulations will have been complied with. More information on these rules can be found in the CRA's information circular IC98-2, Prescribed Compensation for Registered Pension Plans or by contacting the Registered Plans Directorate at (613) 954-0419.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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