22 December 1989 Income Tax Severed Letter 7-4418 - Prepaid leave of absence 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 September 20, 1989, wherein you requested our views in respect of the above-noted proposed Plan.

As noted in Information Circular 70-6R, we do not express opinions on specific proposed transactions other than as a reply to an advance income tax ruling request. As a consequence thereof, we may only offer the following general comments.

A plan like yours would ordinarily be considered a "Salary Deferral Arrangement" as defined under subsection 248(1) of the Income Tax Act, unless it qualifies as a prescribed plan in accordance with section 6801 of the Income Tax Regulations (the "Regulations").

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

• 1. Pursuant to paragraph 6801(a)(iv) of the Regulations, the Plan must provide that any interest or additional amounts that may reasonably be considered to have accrued for the benefit of the employees in a year must be paid in that year to the employee.
• 2. The Plan must provide that the employee returns to his employment for a period at least equal to the period of the leave of absence so that it complies with subparagraph 6801(a)(v) of the Regulations.
• 3. The Plan must provide that if the employee does not take his leave of absence in the designated period, the deferred amount must be paid to him in the first year that commences after the end of the deferral period.
• 4. Pursuant to paragraph 6801(a)(iii) of the Regulations, the Plan must provide that throughout the period of leave of absence, the employee does not receive any salary or wages from the employer or from a person with whom the employer does not deal at arm's length other than the amount by which the employee's salary under the Plan was deferred or is to be reduced and reasonable fringe benefits.
• 5. XXX

It should be noted that Unemployment Insurance premiums are to be based on the employee's gross salary before deferrals during the period of deferral and no premiums are to be withheld from the deferred amounts when paid to the employee during the leave period.

Furthermore, Canada Pension Plan premiums are to be based on the salary the employee actually receives during both the deferral period and the leave period.

We trust the above comments will be of assistance to you.