23 August 1989 Income Tax Severed Letter 5-8389 - 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.

Dear sirs:

This is in reply to your letter of June 24, 1989, referred to us from our Edmonton District Office on July 17, wherein you requested our review and comments on your proposed deferred salary leave plan.

We have reviewed your plan and note some concerns which you should address in order to make the plan fully compatible with section 6801 of the Income Tax Regulations (the "Regulations").

• 1. The plan must specifically provide that a participant must return to his employment after the leave of absence for a period that is not less than the period of the leave of absence. The plan may, if it is desired, provide for an employee to return to the employ of another employer which participates in the same or a similar arrangement.
• 2. The plan should provide that all amounts held under the plan will be paid out no later than the end of the first taxation year of the employee (generally the calendar year) that commences after the end of the deferral period.
• 3. Article 3-4 of the plan and clause 5 of the plan agreement (schedule "B") are not in accord with the requirements of the Regulations. First, the application or non-application of a plan provision should not be based solely on the considerations of Revenue Canada, Taxation, particularly when alternative courses of action based on that consideration are not clearly detailed in the plan. Second, subparagraph 6801(a)(iv) of the Regulations requires that any income earned by a plan trust in each calendar year (clause (A) of the subparagraph) or any amount that may reasonably be considered to have accrued to or for the benefit of the employee in a taxation year (Clause (B) thereof) must be paid to the employee by December 31 of that year. Paragraph 12(1)(a) of the Income Tax Act has no application to income paid out of a deferred salary leave plan.
• 4. In Article 4.4 and 4.5 of the plan, it is provided that "[a] postponement will not move the commencement date of the leave beyond six years from the date of enrollment in the plan". The regulations require that this deferral period must commence immediately after a period "not exceeding 6 years after the date on which deferrals for the leave of absence commence". This date may or may not be the same as the date of enrollment in the plan.
• 5. We also note that the words "subject to clause 4.4 and 4.5" in the last sentence of Article 4.5 of the plan appear to have been added in error. Please note that the length of the deferral period must not exceed 6 years in any event.

Provided the plan is amended as noted above, it is our opinion that it will be a prescribed plan under paragraph 6801(a) of the Regulations.

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