5 April 1990 Ministerial Correspondence 74754 F - Leave of Absence Plans

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.

April 5, 1990

Dear Sirs:

Re: Leave of Absence Plans 24(1)

Your request to the Toronto District Taxation Office for approval of the above-referenced plans (the "Plans") has been referred to this office for reply.

We note in the documents submitted for our review the reference to "an advance income tax ruling from Revenue Canada, Taxation".  Such a ruling is given only where the request is submitted in the manner set out in Information Circular 70-6R, a copy of which is enclosed for your perusal.  The current hourly rate is $65 and the minimum deposit is $325.  The following comments reflect an expression of opinion only and are not binding on the Department, as explained in paragraph 24 of Information Circular 70-6R.

As indicated in the Plans, the provisions that govern deferred salary leave plans are contained in paragraph 6801(a) of the Income Tax Regulations ("the Regulations").  A photocopy of that paragraph is enclosed for your perusal.  It is unnecessary to have the Plans "approved" by Revenue Canada, Taxation prior to their implementation, only that the Plans comply with the provisions of paragraph 6801(a).  Our review of the submitted material indicates that the Plans, for the most part, comply with those provisions but we did note the following (our "point" references are to those in the Policy for each of the 24(1) and the 24(1) .

1.     The Plans must be established for the main purpose of permitting the participant to fund a leave of absence.  In this regard, we note that 24(1).  A voluntary withdrawal provision of this nature may indicate that the main purpose of the Plans is not to permit the participant to fund a leave of absence but rather to defer income taxes.  We have a similar concern with respect to the 24(1). We suggest that points 24(1) be amended to provide a participant with the right to withdraw funds only in the case of financial or other hardship.

2.     By virtue of subparagraph 6801(a)(i) of the Regulations, the leave of absence must commence immediately after the deferral period and the deferral period cannot exceed six years.  In this regard, we note that 24(1).  Since subparagraph 6801(a)(i) does not provide for any exceptions to when the leave must be taken, we suggest that this provision and any references thereto be deleted from the Plans.  Perhaps it was intended that the employer and/or the employee would be allowed to extend the deferral period, which is acceptable provided the deferral period is not extended beyond the six year limit set out in subparagraph 6801(a)(i).

3.     By virtue of subparagraph 6801(a)(iii) of the Regulations, the Plans must provide that throughout the leave period the participant will not receive any salary or wages from the employer, or from any other person or partnership with whom the employer does not deal at arm's length, other than the deferral amounts and reasonable fringe benefits. 24(1) Also, we suggest that of the  Plans be amended to indicate that consent will be given only where the employment is with someone other than the employer or a person or partnership with whom the employer does not deal at arm's length.

We suggest that the following information be included in the Plans:

4.     All amounts paid out of a participant's deposit account represent employment income to the participant, including any earnings (interest, etc.) on the deferred amounts.  Accordingly, form T4 should be used by the 24(1) to report the earnings and the usual tax withholdings and remittances must be made.

5.     Unemployment insurance premiums will be based on the gross salary during the deferral period and will not be payable during the leave period, and Canada pension plan ("CPP") contributions will be based on net salary during both the deferral period and the leave period.  Where the deferred amounts are paid to the employee by a trustee (e.g., 24(1), that trustee is deemed to be an employer of the employee by the CPP Act and is therefore required to pay the employer's contribution in respect of that employee. If the employee is to pay both his portion and the employer's portion during the leave period (a matter to be arranged between the employer and the employee) and the trustee/employer recovers the employer's portion from amounts otherwise payable to the employee, the amount so recovered will not form part of the employee's gross salary.

As stated above, this letter is not an advance income tax ruling but is merely a statement of opinion on the specifics of your proposed Plans and is not binding on the Department.  However, should your Plans be amended as indicated above, it is our opinion that they would meet the requirements set out in paragraph 6801(a) of the Regulations.

We trust our comments are of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate