2006 Ruling 2006-0169391R3 - 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.

Principal Issues: Will the Taxpayer's proposed salary leave plan satisfy the requirements in paragraph 6801(a) of the Regulations.

Position: Yes.

Reasons: Based on the facts and proposed transactions as described.

XXXXXXXXXX 								2006-016939

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Taxpayer") BN XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the Taxpayer. We also acknowledge the information provided in your various emails and in our telephone conversations (XXXXXXXXXX).

To the best of your knowledge and that of the Taxpayer, none of the issues involved in the ruling request is:

i. in an earlier return of the Taxpayer or a related person;

ii. being considered by a tax services office or a tax centre in connection with a tax return already filed by the Taxpayer or a related person;

iii. under objection by the Taxpayer or a related person;

iv. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and

v. the subject of a ruling previously issued by the Directorate to the Taxpayer or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.

Our understanding of the facts, the proposed plan and the purpose of the proposed plan is as follows:

Facts

1. The Taxpayer is XXXXXXXXXX.

2. The Taxpayer employs approximately XXXXXXXXXX permanent and part-time staff. Its Head Office is located in XXXXXXXXXX. It also has a total of XXXXXXXXXX regional offices across XXXXXXXXXX.

3. Subject to the receipt of a favourable advance income tax ruling from the Canada Revenue Agency (the "CRA"), the Taxpayer will establish a self-funded leave plan (the "Plan"). It will be the only plan of this nature in place for the Taxpayer. The Plan will operate as described below.

Proposed Plan

4. Employees who have completed a minimum of XXXXXXXXXX years of continuous service, whether part-time or full-time, may apply to participate in the Plan. However, a minimum of XXXXXXXXXX years of continuous service is required before a leave of absence can commence. Continuous service includes service as both a contract and permanent employee as long as the period of service in question was uninterrupted.

5. Applications ("Applications") for participation under the Plan must be submitted on XXXXXXXXXX of any given calendar year, except for XXXXXXXXXX, wherein Applications were accepted on XXXXXXXXXX. Applications must indicate the following information:

• the anticipated start date and return date for the leave period (the "Leave of Absence");
• the portion of salary (the "Salary Deferrals") to be deferred or withheld in each pay period to fund the Leave of Absence;
• the period during which Salary Deferrals are withheld (the "Deferral Period"); and
• the purpose of the Leave of Absence if relevant to its timing.

6. The Leave of Absence must last at least 6 consecutive months but no longer than 12 consecutive months and must begin immediately after the Deferral Period ends. The Deferral Period cannot exceed 6 years from the date on which the Salary Deferrals began (the "Implementation Date").

7. Salary Deferrals cannot exceed 33 1/3 percent of an employee's salary in any one year. During the Deferral Period, an employee will receive his or her normal salary less the amount that they have chosen to contribute to the Plan. During the Deferral Period, income taxes and Canada Pension Plan ("CPP") premiums will be calculated on the reduced salary while Employment Insurance ("EI") premiums will be calculated on the employee's full salary.

8. An employee's manager will review and recommend approval of Applications, but department heads will make the final decision. However, approval by the Taxpayer's chief executive officer is required for any member of the senior management team wishing to participate in the Plan, and approval from the chair of the Taxpayer's board of directors is required in the event of a request from the Taxpayer's chief executive officer. Each Application will be reviewed and approved on a case-by-case basis based on current business needs and department operations. A fundamental principle of the Plan is that business operations cannot be compromised while any employee is on a Leave of Absence.

9. Within XXXXXXXXXX months of submitting an Application, an employee will receive a written response either approving or denying (with explanation) his or her Application and, in some cases, will be invited to reapply at a later date, in which case, his or her Application will be given priority in the next round of Application reviews.

10. Once an employee's Application has been approved, the participating employee (the "Participant") and his or her manager will sign an agreement (the "Agreement") that sets out the obligations of each party. A copy of the Agreement will be maintained in the Participant's file by the Taxpayer's Human Resources Department.

11. At least XXXXXXXXXX months prior to the start of a Leave of Absence, a Participant must provide written confirmation of the start and end dates for such Leave of Absence to his or her manager. A request by a Participant for an amendment to the original Leave of Absence must be approved by his or her manager and department head. Also, in the event of a significant unforeseen operational circumstance beyond the Taxpayer's control and where no feasible option exists, the manager and /or department head, with the Participant's written consent, may request a postponement of the original Leave of Absence. However, under no circumstances, will the requirements set out in paragraphs 6 and 7 above be contravened. In addition, Salary Deferrals will cease at the commencement of the Leave of Absence, even when a postponement has been granted.

12. A Participant will authorize the withholding of Salary Deferrals from his or her gross salary for deposit into a trust account (the "Trust Account"), on a bi-weekly basis, starting on the Implementation Date and ending immediately before the Leave of Absence. The Trust Account will be established in the Participant's name with a custodian (the "Custodian") selected by the Taxpayer. Payroll administrators will deduct and transfer funds to the Custodian where they will be retained in the Trust Account for the sole benefit of the Participant until the commencement of the Leave of Absence or the dissolution of the agreement between Taxpayer and the Participant, as described in paragraph 16 below.

13. A Participant will not receive any salary, allowance or tuition reimbursement from the Taxpayer during the Leave of Absence, other than payments from the Trust Account. During the Leave of Absence, the Participant will be responsible for the full cost of coverage of any particular employee benefit program to which he or she may continue to subscribe.

14. During the Leave of Absence, a Participant will be paid from the Trust Account in approximately equal bi-weekly instalments, from which will be deducted any statutory withholdings, including income taxes and CPP premiums but not EI premiums. A T4 slip will be issued to the Participant in a calendar year to reflect the amounts paid to the Participant in that year. All amounts from the Trust Account must be paid to the Participant no later than the end of the first calendar year that commences after the end of the Deferral Period.

15. Any income or other additional amounts in the Trust Account that may reasonably be considered to have accrued to or for the benefit of a Participant to the end of a calendar year will be paid to the Participant in that same calendar year, net of any required statutory withholdings. Any such payments and withholdings will be reported on a T4 slip.

16. After completing a Leave of Absence, the Participant must return to work with the Taxpayer for a period at least equal to the period of the Leave of Absence. A Participant will be returned to his or her original position if it is still available, or to a comparable one if it is not. (A comparable position is one that is at the same salary and grade level).

17. A Participant may only withdraw from the Plan under an extenuating circumstance, such as extreme financial hardship. However, a Plan will be terminated and the accumulated funds in the Participant's Trust Account will be released to the Participant or his or her estate, as the case my be, in the following situations:

(i) a Participant dies or is placed on long-term disability; or

(ii) a Participant's employment with the Taxpayer ends, either voluntarily or involuntarily.

In such cases, the accumulated funds in the Trust Account will be released to the Participant within 60 days, except in the case of death, in which case the accumulated funds may be paid to the Participant's estate or beneficiary on an earlier date specified by the executors or administrators of the Participant's estate.

18. The Plan is not established to provide retirement benefits.

Purpose of the Proposed Plan

The purpose of introducing the Plan is to act as incentive for attracting and retaining employees. The Plan will provide employees with an opportunity to get a break from work for a minimum of 6 months to a maximum of 1 year, during which they can pursue any activity they so choose, e.g., leisure, travel, time with family, volunteer work, etc.

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, and provided that the features of the Plan are as described above, we rule as follows:

The Plan will satisfy the requirements in paragraph 6801(a) of the Income Tax Regulations (the "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.

Comments

i. The above advance income tax ruling, which is based on the Act and the Regulations in its 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 IC 70-6R5, dated May 17, 2002, and is binding on the CRA provided the proposed Plan is implemented before XXXXXXXXXX.

ii. The above income tax ruling is based solely on the facts and proposed transactions described above and does not depend on any other information made available to CRA, whether such information was provided by way of additional documentation submitted with the ruling request or otherwise. Any reference in this letter to such other information is made solely for the convenience of the reader.

iii. Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed any of the tax consequences relating to the facts and proposed transactions described above other than those specifically described in the ruling.

Yours truly,

XXXXXXXXXX
Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch