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: Can an employee take a leave period of less than six months?
Position: Routine
Reasons: Routine
2006-021189
XXXXXXXXXX Bruce Hartt
(613) 946-3558
December 18, 2006
Dear XXXXXXXXXX:
Re: Deferred Salary Leave Plan - Leave period
This is in reply to your e-mails of October 25 and November 28, 2006. In your e-mails, you indicated that you are participating in a Deferred Salary Leave Plan ("DSLP") and after completing the four year deferral period, you are currently on a one year leave of absence which began on August 17, 2006. In your e-mail you indicated that you are currently pregnant and have been advised that you are unable to suspend your leave of absence so that you can take advantage of your maternity leave benefits and consequently you wish to withdraw from the DSLP. However, the financial institution that is holding your deferred salary has told you that a requirement of the CRA is that an employee is not allowed to withdraw from a DSLP until serving at least six months of the leave of absence ("Leave Period"). You have asked us to confirm whether or not you can withdraw from the DSLP before serving six months of the leave period.
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.cra-arc.gc.ca/tax/technical/incometax/menu-e.html.
When an employee commences the Leave Period of a DSLP, subparagraph 6801(a)(i) of the Income Tax Regulations (the "Regulations") prescribes the minimum length of time that a Leave Period must last. The Regulations state that if the Leave Period is for the purpose of attending a designated educational institution on a full-time basis, the leave must be for at least 3 consecutive months. If the Leave Period is taken for any other reason, the Leave Period must be for no less than 6 consecutive months.
Although the Regulations do not set a maximum length of time for a Leave Period, the plan must specify that all amounts held for the employee's benefit under the arrangement will be paid out by the end of the first calendar year that begins after the end of the deferral period. It should be noted that this comment applies where the DSLP continues to exist and is being operated in accordance with the Regulations. If a DSLP falls offside of the Regulations, it would no longer qualify for DSLP treatment and all deferred amounts plus unpaid interest, if any, should be paid to the employee less any applicable withholding tax, and included in his or her income for that year.
Subparagraph 6801(a)(v) of the Regulations requires a DSLP to provide that an employee will return to work after the leave of absence for a period that is not less than the period of the leave of absence. The purpose of the provision, in general, contemplates a period of leave of absence from employment, followed by a return to work and not by a subsequent retirement or absence from work. Consequently, if, at the time the arrangement is made, the employee does not intend to return to work, any amounts deferred under the plan would be included in income in the years in which the deferrals occurred. However, where an arrangement meets the provisions of the Regulations at the time it is established, but at some later date due to unforeseen circumstances, either the employee or the employer cannot abide by the provisions of the agreement, the arrangement between the employer and the employee will fail to meet the requirements of the Income Tax Act to be a prescribed plan. When this occurs, 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.
As stated above, the Regulations require that an employee return to work after a leave of absence for a period that is not less than the period of the leave of absence. Based on the information you have provided, you stated that your intentions are to go on maternity leave and will not return to work immediately after your Leave Period. Provided your DSLP met the provisions of the Regulations at the time you entered into the arrangement, at the point in time you knew you were not returning to work immediately following your Leave Period and that you planned to go on maternity leave, the provisions of the Regulations relating to DSLPs were no longer met and you were required to terminate the DSLP at that time. When the DSLP is terminated 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.
As requested, we have enclosed copies of documents 9632985 and 9625733.
We trust our comments are of assistance.
Yours truly,
Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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