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 are the tax consequences if an employee retires after a period of leave under a DSLP?
Position: The arrangement would cease to be a DSLP at the time the conditions in paragraph 6801(a) are not met with the result that any unpaid deferred salary would be included in the employee's income at that time
Reasons: Paragraph 6801(a) of the Regulations requires a DSLP provide that a participant return to work following their leave of absence.
2008-029526
XXXXXXXXXX Dave Wurtele
(613) 957-2093
October 17, 2008
Dear XXXXXXXXXX :
Re: Deferred Salary Leave Plan - Retiring After Leave
This is in reply to your letter of May 30, 2008, addressed to the St. John's Tax Centre, requesting clarification about the requirement that an employee on leave under a deferred salary leave plan ("DSLP") return to work following the period of leave. We also acknowledge your subsequent email of October 6, 2008.
Our Comments
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.
A DSLP is an arrangement that permits an employee to fund, through salary deferrals, a leave of absence from their employment. Normally, deferred salary would be included in income when it is earned pursuant to the salary deferral arrangement provisions in the Income Tax Act, even though the salary may only be received in a subsequent year. However, deferred salary under a DSLP is expressly excluded from these rules with the result that it is included in income when received rather than when earned.
To qualify as a DSLP, an arrangement must satisfy the conditions set out in paragraph 6801(a) of the Income Tax Regulations (the "Regulations"). One of these conditions requires that the arrangement provide that the employee 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 this condition is to ensure that a period of leave of absence from employment is a bona fide leave of absence and not a transition into retirement. If it is evident that an employee had entered into a salary deferral arrangement with the intention of retiring following their leave of absence, the arrangement would not qualify as a DSLP and the deferred salary would be taxable in the year earned rather than in the year received. In such cases, reassessments of prior year income tax returns may be required for unreported deferred salary in those prior years.
On the other hand, where an arrangement met the conditions of the Regulations at the time it was established, but, at some later time, either the employee or the employer does not abide by the conditions, the arrangement would cease to be a DSLP at that point in time. In such a case, any unpaid deferred salary of the employee would be included in the employee's income at that time. There would generally be no additional tax consequences for prior years. Typically, when an arrangement ceases to be a DSLP the employer would terminate the arrangement and pay all remaining funds held for the benefit of the employee to the employee, less any applicable withholding tax.
We trust that these comments will be 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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