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 2007-025081
XXXXXXXXXX , 2007
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, in which you requested an advance income tax ruling. We also acknowledge the information provided in your various emails, facsimiles and in our telephone conversations (XXXXXXXXXX).
This letter is based solely on the facts and proposed transactions described below. Any documentation submitted in respect of your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
Definitions
1. All terms used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.
2. Unless otherwise stated, the following terms and expressions have the meanings specified below:
(a) "Account" means: the account(s) established by the Employer in the name of a Participant for the purpose of accounting for the investments attributable to the Participant's Deferred Compensation Amount. This may take the form of a separate account number in the Employer's accounting system;
(b) "Accrued Interest" means: the amount of interest earned, as described in 11 below, on the monies retained by the Employer on behalf of the Participant;
(c) "Act" means: the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;
(d) "Application" means: XXXXXXXXXX;
(e) "Current Compensation Amount" means: the salary and allowances payable by the Employer to the Participant during a Year of the Deferral Period;
(f) "Deferral Period" means: the number of Years for which compensation is deferred as described in 9 below, including the Years referred to in 19, 20 and 21 below if applicable;
(g) "Deferred Compensation Amount" means: the portion of the Current Compensation Amount which is retained by the Employer for a Participant in each Year as described in 9, 10 and 11 below, together with Accrued Interest calculated as described in 11 below but less any Accrued Interest paid to the Participant as described in 12 below;
(h) "Eligible Employee" means: any permanent employee with a minimum of XXXXXXXXXX years service with the Employer at the time of application;
(i) "Employer" means: XXXXXXXXXX;
(j) "Participant" means: an Eligible Employee whose application to participate in the Plan has been accepted as described in 6 below;
(k) "Plan" means: the XXXXXXXXXX as described in 5 through 36 below;
(l) "Regulations" means: the Income Tax Regulations, Consolidated Regulations of Canada, Chapter 945, as amended to the date hereof;
(m) "Superintendent" means: the superintendent of the Employer; and
(n) "Year" means: a contract year beginning on XXXXXXXXXX of a calendar year and ending on XXXXXXXXXX of the immediately following calendar year.
Facts
3. The Employer files its tax returns with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre. The Employer operates a school for grades four through nine. The Employees are involved in the provision of the school programs.
4. The Employer has agreed to establish the proposed Plan for its Eligible Employees.
Proposed Plan
5. An Eligible Employee must make a written Application, in the form prescribed, to the Superintendent by XXXXXXXXXX in order to participate in the Plan at the start of the following Year.
6. The approval of each application shall be at the sole discretion of the Superintendent. The Superintendent shall, on behalf of the Employer, advise each applicant of the approval or disapproval of their application and, if the latter, an explanation. The decision of the Superintendent shall be final.
7. If the application is approved, the participation of the Eligible Employee in the Plan shall become effective on the first day of the folowing Year.
8. The Application once signed by a Participant and the Employer will constitute a written agreement between the Participant and the Employer. The Plan and the Application will provide Participants with the opportunity to defer a specified percentage of the Participant's Current Compensation Amount during a Deferral Period in order to take a one-year self-funded leave of absence commencing immediately after the Deferral Period.
9. In the Application, a Participant may elect a Deferral Period of one to five years duration and must elect to defer an identical percentage of their Current Compensation Amount for each year of the Deferal Period. The amount deferred in any one taxation year (calendar year) is limited to 331/3% of the Participant's compensation for the calendar year and the total percentage deferred over the Deferral Period is limited to XXXXXXXXXX% of the Participant's total Current Compensation Amount over the Deferral Period.
10. For each Year during the Deferral Period, a Participant shall receive his or her Current Compensation Amount less the percentage to be deferred as specified in the Application.
11. The Deferred Compensation Amount withheld shall be retained by the Employer and Credited to the Participant's Account. The Employer shall credit to the Account of each participant, monthly Accrued Interest calculated at the Employer's rate of return for GIC investments.
12. The Employer shall, on each date specified in the Application, pay to the Participant the Accrued Interest to such date. The dates specified in the Application are:
(a) the XXXXXXXXXX which occurs at the end of the calendar year in which the Employee became a Participant;
(b) each XXXXXXXXXX occurring after the date specified in subclause (a) above; and
(c) the last day of the leave of absence, or when the Employer makes a payment described in 19, 29, 30, 31 or 32 below.
13. Accrued Interest paid shall be considered to be 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.
14. The Employer shall make an annual report to each Participant as to the Deferred Compensation Amount retained by the Employer for the Participant including any Accrued Interest which has not been paid out as descibed in 12 above. The annual report shall be made no later than XXXXXXXXXX of each year and shall cover information up to the end of the preceding calendar year, i.e. XXXXXXXXXX.
15. The leave of absence is to be taken in the Year immediately following the Deferral Period. The term of the leave of absence will be a twelve-month period beginning on XXXXXXXXXX of that Year.
16. Amounts paid to a Participant during the leave of absence other than Accrued Interest, shall be in the form of twelve equal monthly installments on the dates and in a manner consistent with normal payroll procedures. In no event shall payments be more frequent than monthly.
17. The Payments paid to a Participant during the leave of absence shall be based upon the Deferred Compensation Amounts retained by the Employer as described in 31 through 34 below less any deductions described in 27 and 28 below and any amounts required by law to be paid by the Employer Board for or on behalf of the Participant.
18. A 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 of absence, other than payment of the Deferred Compensation Amounts (including any Accrued Interest) and the statutory benefits that the Employer would normally pay to, or on behalf of, the Participant.
19. In the event the Employer is unable to obtain a suitable replacement for the Participant for the period of the leave of absence, the Employer may on one occasion, in its discretion, and with not less than six month's notice prior to the starting date of the leave of absence, defer the leave of absence for one Year. In such a case, the Participant may choose to stay in the Plan or withdraw from the Plan, whereupon the Employer will pay to the Participant the Deferred Compensation Amount including Accrued Interest in one lump sum payment within sixty days of such withdrawal. Income tax will be deducted in accordance with applicable legislation.
20. A Participant may, on one occasion only, with the consent of the Employer, postpone the leave of absence for one Year. Notice must be given, in writing, not less than six months prior to the starting date of the leave of absence.
21. A Participant may, on one occasion, give notice to the Employer stating that the Participant wishes to suspend participation in the Plan for a period of twelve months as at the next anniversary date of enrolment in the Plan. In such case, the Employer shall pay the Current Compensation Amount to the Participant as if the Participant were not enrolled in the Plan for such Year. The Deferred Compensation Amount shall continue to be held by the Employer until the Participant withdraws from the Plan or commences the leave of absence. Suspension of participation shall not change the year established for the leave of absence. If a Participant has given notice in accordance with this provision, the Participant's participation in the Plan shall be reinstated commencing the first of the month which immediately follows the twelve months of suspension.
22. Notwithstanding 15, 19, 20 and 21 above, under no circumstances will the Deferral Period exceed six years from the date on which deferrals commence and the leave of absence must commence immediately after the Deferral Period.
23. The period of leave shall not interrupt the Participant's service record, however, during the leave of absence, the Participant will not accumulate or be entitled to the following:
(a) experience for salary increments,
(b) statutory holidays, maternity, parental, sick or any other leaves, and
(c) promotions.
24. The Participant must return to their regular employment after the leave of absence for a period of time that is not less than the period of the leave of absence. The Employer shall endeavour to place the Participant in the same position that the Participant had prior to the leave of absence or in a similar type of employment.
25. After participation in the Plan, the Participant's salary and benefits shall be as provided by the Employer's policy.
26. The Employer shall continue paying its share of applicable benefit plan costs during the Deferral Period. During the Deferral Period, any applicable benefits computed with reference to salary shall be structured according to the Participant's Current Compensation Amount.
27. The Employer shall maintain applicable benefit coverage (excluding short and long-term disability coverage) for a Participant during the leave of absence provided the Participant agrees to pay the full share of the cost of benefits. Any applicable benefits computed with reference to salary shall be structured according to the Participant's Deferred Compensation Amount.
28. During the leave of absence, the Employer shall recover the Employer's share of Canada Pension Plan contributions and Employment Insurance premiums, if any, from the Participant on a monthly basis from the Deferred Salary Amount payments.
29. A Participant who ceases to be employed by the Employer must withdraw from the Plan. Within sixty days of withdrawal, the Employer will pay to the Participant the value of the Participant's Account in one lump sum payment. Income tax will be deducted in accordance with applicable legislation.
30. In extenuating circumstances, such as financial hardship, and with the consent of the Employer, a Participant may withdraw from the Plan upon giving not less than six months notice prior to the date on which the leave of absence is scheduled to occur. Within sixty days of withdrawal, the Employer shall pay to the Participant the value of the Participant's Account in one lump sum payment. Income tax will be deducted in accordance with applicable legislation.
31. Should a Participant die, the Employer shall, within sixty days of notification of such death, pay the value of the deceased Participant's Account to the Participant's estate subject to the Employer receiving any necessary clearances and proofs normally required for payment to estates. Income tax will be deducted in accordance with applicable legislation.
32. In the event the Employer's charter is terminated or is not renewed, the Plan shall be terminated. Within sixty days of the event, the Employer shall pay to all Participants the value of their Accounts in one lump sum payment. Income tax will be deducted in accordance with applicable legislation.
33. The Plan may be amended or terminated by the Employer in accordance with its policy provided that no amendment will be made to the Plan which will prejudice any income tax ruling which is applicable to the Plan prior to the amendment. Any amendments shall be binding upon all future Participants.
34. The Employer shall bear the administrative expenses of the Plan.
35. The Employer will not pledge any of the monies retained by the Employer as described in 11 above for any purpose whatsoever.
36. A Participant may not pledge or hypothecate any of the Participant's rights under the Plan as security for a loan.
Purpose of the Proposed Plan
The purpose of introducing the Plan is to provide Participants with the opportunity to defer a specified percentage of the Participant's Current Compensation Amount during a Deferral Period in order to take a one-year self-funded leave of absence commencing immediately after the Deferral Period.
37. To the best of your knowledge, 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 a tax centre in connection with a tax return already filed by the Employer or a related person;
iii. under objection by the Employer 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 Employer or a related person.
Ruling Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed Plan, and the 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 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.
i. The above advance income tax ruling is based on the Act and the Regulations in its present form and does not take into account any proposed amendments thereto, and 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. 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
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2007
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2007
Email this Content