9 February 1989 Income Tax Severed Letter 5-7407 -  

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.

A.B. Adler (613) 957-8962

February 9, 1989

Dear Sirs:

Your letter of December 15, 1988 concerning a deferred salary education leave plan and addressed to the Inquires Section of the Regina District Taxation Office was referred to this office for reply.

Our comments follow the ordor of your queries.

1. The Income Tax Act (the "Act") requires amounts of salary that are deferred by way of a "salary deferral arrangement" (an "SDA"), as that term is defined An subsection 248(1) of the Act, to be taxed in the employee's hands on an accrual basis rather than when received, effective for arrangements entered into after February 15, 1986. An SDA does not include a prescribed plan or arrangement which is described in section 6801 of the Income Tax Regulations (the "Regulations") (copy enclosed). There are two general types of prescribed plans described therein: (i) an arrangement in writing that is established before July 28, 1986 "paragraph 6801(b)), and (ii) an arrangement in writing that is established after July 27, 1986 (paragraph 6801(a)). The latter arrangement is relevant to your query.

A prescribed plan or arrangement described in paragraph 6801(a) of the Regulations is a legal arrangement in writing between an employee and his employer that must meet all the relevant requirements in subparagraphs (a)(i) to (vi) therein. Subject to such requirements being met qualifying transfers of before-tax earnings of an employee may be made to the plan and only the remainder of the employee's earnings will be subject to income tax computed in the ordinary manner at that time. Payments of deferred salary during the leave period will be subject to income tax computed in the ordinary manner.

2. (i)  With respect to tuition fees where an employer has
        reimbursed an employee for tuition fees paid by the 
        employee, the amount reimbursed should be reported 
        as income of the employee for the year in which the 
        payment was made. Similar treatment would apply to a 
        reimbursement by the employer of the employee's book 
        expenditures, and the employer generally would be 
        entitled to a deduction with respect to its 
        reimbursements of reasonable tuition and book costs 
        to its employees.

   (ii) Clause 6801(a)(iii)(B) of the Regulations permits
        the receipt of reasonable fringe benefits that the 
        employer usually pays to or on behalf of its 
        employees during the period of leave of absence.

3. You may reimburse reasonable tuition and book expenses at the end of the leave period. The income tax implications are as described in 2(i) above.

4. Subparagraph 6801(a)(v) of the Regulations requires that the employee return to his regular employment with an employer who participates in the plan or arrangement for a period that is not less than the period of the leave of absence. Your proposed forgiveness of a loan to the employee in respect of his tuition and book costs based upon that employee's return to service is not governed by the rules in paragraph 6801(a) of the Regulations, and would give rise to a taxable benefit to that employee under paragraph 6(1)(a) of the Act. The value of such benefits is determined under subsection 6(15) of the Act. Generally, the employer would be entitled to a deduction in respect of a forgiven loan for reasonable tuition and book expanses.

5. There is no requirement under the Act or Regulations that a plan or arrangement that qualifies under paragraph 6801(a) of the Regulations be registered.

We trust that our comments are of assistance to you.

Yours truly,

for Director Financial Industries Division Rulings Directorate