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: Whether a proposed deferred salary leave plan will satisfy the conditions to qualify as a "prescribed plan or arrangement" in paragraph 6801(a) of the Regulations in order to be exempted from the "salary deferral arrangement" rules.
Reasons: The condition 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 is not satisfied.
February 7, 2018
Re: Proposed deferred salary early retirement program
This is in reply to your correspondence of October 18, 2017 wherein you request our views concerning the income tax treatment of a proposed deferred salary early retirement program.
The proposed program provides employees a means of financing their first full year of retirement. Employees opting for the program would receive 75% of their regular salary for the last three years of their career and then collect an additional year of their salary at a rate of 75% as well as benefits during the first year of retirement. The employee does not return to their regular employment after the fourth year.
This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). 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 IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
A deferred salary leave plan (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 of the 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. Of note to your proposal is the condition in subparagraph 6801(a)(v) that requires that the arrangement provide for the employee to return to work after the leave of absence for a period of not less than the period of the leave of absence. This condition prevents a plan from qualifying as a DSLP where it is used as a pre-retirement vehicle whereby the employee retires immediately following the period of absence.
The proposed program does not meet this condition and therefore would not qualify as a DSLP. Consequently, any salary deferred under the program would be included in the employee’s income in the year earned rather than in the year received.
We trust our comments will be of assistance.
Acting Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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