4 July 1989 Internal T.I. 73987 F - Prepaid 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.

July 4, 1989

Dear Madam,

Re:  Prepaid Leave Plan (the "Plan")

This is in reply to your letter of March 14, 1989, wherein you requested our comments upon the above noted Plan.

As discussed during a telephone conversation of June 13, 1989, (Harding 19.1) your letter was not referred to our office for reply until June 12, 1989. Nevertheless, we apologize for the delay.

As further discussed during the conversation, the plan as submitted does not comply with several provisions of Part LXVIII of the Income Tax Regulations (the "Regulations"). In brief,the areas of concern are as follow:

1.     24(1)

     Regulation 6801 clauses (IV)(A) and (B) require the income of the plan to be paid out annually to the employee. The income must be treated as income from employment, not as interest, and, notwithstanding the fiscal period of the plan for administrative purposes, must be calculated and paid out on a calender year basis.

2.     24(1) A provision of this nature may indicate that the main purpose of the Plan is not to permit the employees to fund a leave of absence but rather to defer income taxes. The plan should be amended to provide the employee with the right to withdraw funds only in the case of financial or other hardship or upon termination of employment.

3.     24(1) To comply with subparagraph 6801(a)(vi) of the Regulations, the Plan must also provide that all amounts will be paid out of the plan no later than the end of the first taxation year that commences after the end of the deferral period.

4.     24(1)  It should be noted, however, that the regulations require the leave period to commence immediately after the deferral period and the deferral period to not exceed 6 years from the date on which deferrals are commenced.

5.     In order to comply with the provisions of subparagraph 6801(a)(v), the plan must be amended to provide that the employee is to return to her regular employment with the employer or an employer who participates in the in the same or a similar arrangement after the leave of absence and for a period that is not less than the leave period.

Enclosed please find a copy of Regulation 6801 for your reference.

In your letter you also requested advice concerning the calculation of CPP and UIC premiums for employees who are members of the Plan. As advised during the above noted conversation, this topic is presently the subject of a Department study and we must therefore defer further comment at this time.

We trust that these comments are satisfactory to your needs.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate