18 April 1986 Income Tax Severed Letter 5-0510 - [860418]

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.

Revenu Canada Revenu Canada Taxation Impot Head Office Bureau principal

B.G. Dodd (613) 995-0051

April 18, 1986

Dear Sirs;

We are writing in reply to your letter of January 31, 1986 concerning teachers self-funded leave plans in relation to accumulated interest.

You describe the essential details of the plan as follows. During each of the first four years, the teacher receives 80% of his or her salary with the remaining 20% being deposited in a joint account XXXX and the employee) with a local trust company. The funds on depose earn interest and are paid over, together with accumulated interest, in the fifth year. You have. asked for a ruling on the treatment of such interest in view of recent changes to the Income Tax Act. You indicate that one employee is exploring the possibility of obtaining a T5 for each year's accumulated interest and then deducting the accruals from the T4 which you would issue in the fifth year. (We assume you mean here that the employee wishes to include the accrued interest in his or her income on an annual basis, and reduce the amount reported as employment income in the fifth year by the amount of interest previously reported.)

While we are unable to provide a ruling as such (advance income tax rulings are discussed in the enclosed information Circular 70-6R) we are prepared to outline our general position on the matter.

The Department is of the view that an employee's entry into an agreement to participate in such plans constitutes an "investment contract" as defined in paragraph 12(11)(a) of the Act. As such, pursuant to the three year interest accrual rules of subsection 12(4) of the Act, the employee is required to report the accrued interest on each third anniversary date of the investment contract. An employee may, however, elect to report the accrued interest on an annual basis pursuant to subsection 12(8) of the Act. Details of the election are contained in the T1 return guide.

In connection with the foregoing, the third anniversary of the investment contract is computed with reference to the date the employee agrees to participate in the plan. Where the employee entered into such an agreement before 1982, the investment contract is deemed to have been issued on December 31, 1984 and the first third anniversary will therefore be December 31, 1987.

In addition, provision is made in subsection 12(10) of the Act for the complete exemption of certain locked-in investment contracts from the interest accrual rules. This applies where an employee has agreed to participate in the arrangement before November 13, 1981 and conditions (a) and (b) in paragraph 22 of the enclosed Interpretation Bulletin IT-396R are satisfied.

In terms of reporting by the issuer of the investment contract (i.e. the employer) where the interest accrual rules do apply, the interest accrued to the third anniversary is to be reported to the employee on a T5 supplementary (in the case of deferred compensation arrangements). The employee would then include the full amount in his tax return for that year (unless a portion has been included in previous years in the case of an annual election). The T4 supplementary issued (i.e. in the leave year) would not include accrued interest amounts.

As you may be aware, the February 26, 1986 Federal budget proposed additional changes to the treatment of salary♦deferrai arrangements. If implemented, these would effectively eliminate the deferral of tax by providing that remuneration which is payable (after February 25, 1986) in a year will be taxable in that year, together with any related interest, and not in any subsequent year in which it is received. The budget indicates that certain types of arrangements, including those governing sabbaticals for teachers, will not be subject to this treatment. Precise details, however, will only become known once the legislation has been prepared and you may wish to examine your situation at that time.

We trust the foregoing will be of assistance to you.

Yours truly,

for Director Financial Industries Division Rulings Directorate