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: What happens if employees participating in a DSLP retire after their leave of absence.
Position: Where it is evident that an employee has entered into a salary deferral arrangement with the intention of retiring following his or her leave of absence, the plan would not qualify as a DSLP and any deferred salary would be taxable in the year earned rather than in the year received.
Reasons: Paragraph 6801(a) of the Regulations requires an employee to return to work following his or her leave of absence.
XXXXXXXXXX
2004-006921
J. Gibbons, CGA
July 8, 2004
Dear XXXXXXXXXX:
Re: Prescribed Plan or Arrangement
This is in reply to your letter dated March 25, 2004, concerning the rules in paragraph 6801(a) of the Income Tax Regulations (the "Regulations") for a prescribed plan or arrangement, commonly known as a "deferred salary leave plan" (DSLP). A DSLP is a plan or arrangement that permits employees to defer a portion of their salary in order to fund a leave of absence from their employment.
In particular, you are concerned about the requirement in subparagraph 6801(a)(v) that a DSLP must provide "that the 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."
In your letter, you indicated that you have received a number of requests from XXXXXXXXXX asking that they be permitted to retire from XXXXXXXXXX immediately upon finishing the XXXXXXXXXX year of their deferred leave plan, i.e., their leave of absence. As a result, you have raised the following questions with respect the rules in paragraph 6801(a) of the Regulations:
1. Is an employee permitted to retire immediately following their leave of absence?
2. If an employee retires following their leave of absence, whether or not permitted under the rules, what are the implications, if any, to the employee and the employer?
3. Is there a requirement that the employer advise the Canada Revenue Agency if an employee resigns or retires following the leave year?
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and the subject matter of a request for an advanced income tax ruling submitted in the manner set out in Information Circular 70-6R5. However, we have provided some general comments below, which we hope will be of assistance to you.
Normally, deferred salary would be included in income when it is earned pursuant to the salary deferral arrangement ("SDA") provisions in the Income Tax Act (the "Act"), even though the salary may only be received in a subsequent year. However, under an exception provided in the Act, deferred salary under a DSLP is taxed when received rather than when earned.
As noted in your letter, the rules for DSLPs, which are set out in paragraph 6801(a) of the Regulations, require an employee to return to work following his or her leave of absence. In our view, the rules do not permit a DSLP to be used as a pre-retirement vehicle whereby an employee retires following the period of leave. Accordingly, where it is evident that an employee has entered into a salary deferral arrangement with the intention of retiring following his or her leave of absence, the plan would not qualify as a DSLP and any deferred salary would be taxable in the year earned rather than in the year received. In such cases, reassessments of prior year returns may be required if there was unreported deferred salary in those prior years.
We trust that these comments will be of assistance.
Yours truly,
Roxane Brazeau-LeBlond, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
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