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: Clarification of how a maternity leave could affect a prescribed plan or arrangement under paragraph 6801(a) of the Regulations.
Position: Paragraph 6801(a) of the Regulations ceases to apply at the time an employee knows he/she no longer intends to return to work immediately following the leave of absence provided for under the Regulation.
Reasons: Paragraph 6801(a) of the Regulations.
XXXXXXXXXX
2015-057780
Faye Kravetz, JD/MBA
June 15, 2015
Dear XXXXXXXXXX:
Re: Deferred Salary Leave Plan and Maternity Leave
This letter is in reply to your e-mails of March 25, 2015 and April 13, 2015, in which you indicated that you are participating in a Deferred Salary Leave Plan ("DSLP") and plan to take a leave of absence from your current employment for a period between the 2015 and 2016 calendar years. You have requested clarification of the tax implications if an employee was not to return to work after his/her leave and instead take an additional leave for maternity leave. You have also requested clarification on whether salary earned in the leave period will be considered insurable earnings and clarification on such an employee's eligibility for employment insurance ("EI") while on maternity leave.
This technical interpretation provides general comments about the provisions of the Income Tax Act (Canada) (the "Act"). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R6 Advance Income Tax Rulings and Technical Interpretations. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency (CRA).
Our Comments
A DSLP is an arrangement that permits an employee to fund, through salary deferrals, a leave of absence from his/her employment. Normally, deferred salary would be included in income when it is earned pursuant to the salary deferral arrangement provisions in the Act, even though the salary may only be received in a subsequent year. However, when a DSLP meets the requirements of paragraph 6801(a) of the Income Tax Regulations (the "Regulations"), deferred salary under the DSLP is expressly excluded from these rules with the result that it is included in income when received rather than when earned. When an employee commences the leave period of a DSLP, subparagraph 6801(a)(i) of the Regulations prescribes the minimum length of time that the leave period must last. The Regulations state that if the leave of absence (" 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 the Leave Period, it is the period during which the individual is absent from employment and during which payments from the DSLP income benefits occur. 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.
Subparagraph 6801(a)(v) of the Regulations requires a DSLP to provide that an employee will return to work after the Leave Period for a period that is not less than the Leave Period. 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 immediately after the Leave Period, 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 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 the Leave Period for a period that is not less than the Leave Period. Based on the information you have provided, you stated that your intentions are to go on maternity leave and 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 you less any applicable withholding tax, and included in your income for the year.
It is worthwhile to note, however, that in the event that a taxpayer intended to go on maternity leave and not return to work immediately after the Leave Period such that the provisions of the Regulations relating to DSLPs were no longer met but the taxpayer did not terminate the DSLP at that time to comply with the requirements stated above, it is our position that a penalty could be assessed. For example, where an employee knew at the time the DSLP agreement was entered into, or at some later time, that the employee would not respect all the conditions of paragraph 6801(a) of the Regulations and the employee knowingly applied the provisions of the Act as if the agreement complied with paragraph 6801(a) of the Regulations and filed his/her income tax return on this basis, the employee could be knowingly or under circumstances amounting to gross negligence, making a false statement to the CRA such that the penalty under subsection 163(2) could apply. Whether a penalty applies under the Act in a given case is a question of fact that can be determined only after a review of all the facts.
With regards to your request for clarification on the extent to which salary earned on the Leave Period will qualify as insurable earnings and your eligibility for EI while on maternity leave, it is the CRA's general position that during the deferral period, EI premiums are to be based on the participant's gross salary (i.e., the amount that would be received without any deferral of salary). This means that payments during the Leave Period will not be subject to EI premiums.
For additional information on how to calculate insurable hours and insurable earnings for a particular period and how to determine eligibility for EI in a particular situation, we would refer you to the CRA website at http://www.cra-arc.gc.ca/tx/hm/xplnd/nsrblhrs-eng.html. Additional inquiries can also be directed to the EI Telephone Information Service at 1-800-206-7218.
We trust our comments are of assistance.
Yours truly,
Mary Pat Baldwin, CPA, CA
Manager
Deferred Income Plans Section I
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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