25 September 1989 Ministerial Letter 58508 F - Deferred Salary Leave Plan for Teachers

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:

This is in reply to your letter of August 4, 1989 in which you requested a technical interpretation concerning a proposed deferred salary leave plan ("Plan") for teachers.

Paragraph 6801(a) of the Income Tax Regulations ("Regulations") (photocopy enclosed) provides the detailed requirements with which your Plan need comply.  Our comments with respect to your Plan are as follows.

1.     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 (subparagraph 6801(a)(ii) of the Regulations).

2.     Concerning clauses 3.4. and 3.5 of Schedule A and clause 5 of Schedule B of the Plan, we do not consider the Plan to be an investment contract for purposes of the accrual rules for interest income under section 12 of the Income Tax Act ("Act").  Subparagraph 6801(a)(iv) of the Regulations provides for the deferred amounts to be held in a specific trust arrangement or in a deposit or similar arrangement.  It is important to note that in either case the deferred amounts are to be held for the benefit of the participant solely.  Further, any income therefrom for each year ending during the period of deferral that has been earned for the benefit of the participant must be paid in the year to the participant, and is required to be treated as income from employment.  Accordingly, form T4 should be used to report the income and the usual tax withholdings and remittances must be made. Note that in order to comply with the payment of interest in the year requirement, employees could enter into separate agreements with their employer whereunder the employer is instructed to retain the income as recontributions by.the employees to the Plan.

3.     Concerning clauses 4.4, 4.5 and 7.1 of the Plan, note that a change in a period of leave or a suspension from participation cannot result in the period of deferral extending beyond six years after the date on which deferrals commenced (per subparagraph 6801(a)(i) of the Regulations).

4.     Concerning clause 5.1 of the Plan, in a case where the Board pays the cost of certain benefits during a participant s year of leave of absence and is reimbursed for such costs from deferred compensation funds, the annual cost of such benefits (net of reimbursements) and the gross amount of deferred amounts are required to be reported on form T4 for the relevant years.  Further, we require that the Plan provide that during the period of such leave a participant 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 (B) of the Regulations.

5.     Concerning clause 4.7 of the Plan, subparagraph 6801(a)(v) of the Regulations requires that after the leave of absence the participant "is to return to his regular employment with the employer ... for a period that is not less than the period of the leave of absence,".

6.     Clause 6.2 of the Plan may permit voluntary withdrawals therefrom.  A voluntary withdrawal provision is of concern to us since it may indicate that one of the main purposes of the Plan is to defer taxes rather than to permit employees to fund a leave of absence.  We recommend that the Plan be amended to permit an employee participating thereunder the withdraw from the Plan only in the case of financial or other hardship, and that all such cases be subject to approval by the Board.

7.     The Plan should provide that no amount held for the benefit of an employee thereunder be paid to the employee at a time that is later than the end of the first taxation year that commences after the end of the period of deferral (subparagraph 6801(a)(vi) of the Regulations).

8.     It is our position that unemployment insurance premiums should be based on gross earnings, including the deferred amounts, in the period of deferral and no such premiums are required during the leave of absence.

9.     The withholding requirements for Canada Pension Plan premiums for purposes of section 6801 of the Regulations are currently under study by this Department.  Once a decision is made you will be informed accordingly.

The above comments are an expression of opinion only and are not binding upon the Department.

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

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate