25 September 1989 Ministerial Correspondence 32674 F - Deferred Salary Leave Plan

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.

September 25, 1989

Dear Sirs:

Re:  Advance Income Tax Ruling Deferred Salary Leave Plan

This is in reply to your letter of August 21, 1989 with a copy of your proposed Deferred Salary Leave Plan wherein you request an advance income tax ruling concerning your proposed Salary Deferral Leave Plan (the "Plan").

We wish to point out that an advance income tax ruling may only be provided when the procedures for its request are complied with.  A proper request entails the provision of all related documents for our review as well as an identification of all of the specific provisions of the Income Tax Act (the "Act") in respect of which the request is to be considered.  A ruling request must also contain a statement as to whether any of the issues involved are to the best of the taxpayer's knowledge being considered by a District Office and/or Taxation Centre in connection with a tax return already filed, or if any of the issues are under objection.

The procedures are discussed in our Information Circular IC-70-6R, a copy of which is attached for your reference (see paragraphs 15 and 16 in particular).

While we cannot, at this time, provide a ruling, we can offer the following comments with respect to your Plan.

Section 6801 of the Income Tax Regulations (the "Regulations") (copy enclosed for your information must be complied with in order for a plan to be exempted as a prescribed plan from the salary deferral arrangement provisions of the Act.

Our review of the Plan indicates that there are a number of deficiencies which should be amended to ensure that it complies with the Regulations:

1.     It should be noted that the Plan is not an "investment contract' under paragraph 12(11)(a) of the Act.  Clause 3.4 of the Plan and clause 5 of Schedule "8" must be amended to provide that interest earned and attributable to a teacher in a year must be paid in that year to the teacher as employment income.  Clause 6801(a)(iv)(B) of the Regulations provides that where deferred amounts are held by or for the account of any person other than a trust referred to in clause 6801(a)(iv)(A) of the regulations, any amount in respect of interest or other additional amounts that may reasonably be considered to have accrued to or for the benefit of the employee to the end of a taxation year must be paid in the year to the employee.

     While the Plan may properly refer to these amounts as accrued interest, it is our view that they are employment income for purposes of the Act. In consequence, the amounts, when received, must be included on the teacher's T4 supplementary and will be subject to withholdings by the Board.

2.     Clause 3.2 of the Plan should make it clear that the maximum percentage deferral in any taxation year of a participant cannot exceed 33 1/3% of the amount of salary or wages that the participant would normally receive in that year (see subparagraph 6801(a)(ii) of the Regulations).

3.     The Plan, in a number of provisions, makes reference to the school year. Such references may be appropriate for the administration of the plan and may, for tax purposes in general, not result in any adverse tax consequences or cause non-compliance with the provisions of section 6801 of the Regulations. Caution, however, should be exercised in this regard. In particular, clause 3.2 of Schedule "A" of the Plan provides that a teacher may defer in respect of each school year, a percentage of his/her current compensation amount not in excess of 100% divided by the number of years he or she wishes to be in the Plan, including the one year leave of absence without taking into account any deferral under Clauses 4.4 and 4.5.  Subparagraph 6801(a)(ii) of the Regulations, however, requires that the percentage deferral in any taxation year of the teacher must not exceed 33 1/3% of the amount of salary that the teacher would normally receive in that year.  A taxation year for an individual is usually the calendar year. In our view, the provision should be revised to ensure that the maximum percentage deferral allowed will also be limited on a calendar year basis as provided in the Regulations.

4.     Subparagraph 6801(a)(i) of the Regulations provides that a leave of absence must commence immediately after the deferral period and that the deferral period must not exceed 6 years from the date on which deferrals are commenced. Clause 4.4 of the Plan provides that the leave of absence may be postponed by the Board on one occasion for one school year if a suitable replacement teacher has not been found for the period of leave.  Clause 4.5 of the Plan provides that the teacher may at his/her option, on one occasion only, postpone the leave for one year.

     A leave of absence must follow, without postponement, immediately after a deferral period. The Department will, however, allow a deferral period to be extended from that which was originally agreed to, so long as the deferral period does not exceed six years in total. Should any postponement cause the leave of absence to commence at a later time, the provisions of subparagraph 6801(a)(vi) of the Regulations will have application and all amounts held under the arrangement will have to be paid to the teacher no later than the end of the first taxation year that commences after the end of the six year deferral period.

5.     It is required that the Plan provide during the period of leave that an employee may not receive any salary or wages from the employer or any other person or partnership with whom the employer does not deal at arm's length except as provided in clause 6801(a)(iii)(A) or (8) of the Regulations.

6.     The Plan should indicate clearly that it is not established to provide benefits to the employees on or after retirement.

7.     The Plan must specify that the minimum leave of absence shall be for a period of six (6) months.

8.     The Plan must provide that the employee shall return to his regular employment for a period at least equal to the period of the leave of absence.  The Plan may, if it is so desired, also provide that an employee may return to the employ of another employer which participates in the same or similar arrangement.

Please be advised that this letter is not an advance income tax ruling, as requested, but is merely a statement of opinion on the specifics of your proposed Plan and it is not binding upon the Department.

While in our view an advance income tax ruling should not be necessary if the Plan is amended as discussed above, should you desire one, we will be pleased to again review your Plan upon its amendment and issue a ruling thereon provided your request is made as noted above.

We trust that our comments will be of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate