20 September 1990 External T.I. 9014935 F - Prepaid Leave Program

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 20, 1990

19(1)

Re: Prepaid Leave Program ("plan") 24(1)

This is in response to your letter of June 29, 1990, requesting our confirmation that the above mentioned plan meets the requirements of Regulation 6801 of the Income Tax Act ("Act").  Such confirmations can only be given in response to an Advance Income Tax Ruling request submitted in accordance with Information Circular 70-6R.  However, we can offer the following comments.

Paragraphs (d) and (e)(5) require the income earned on the deferred amounts to be paid and reported annually by the employee.  This amount must be reported as employment income.

Paragraph (e)(6) should state that the employee cannot receive any salaries or wages from either the employer or a related employer during the leave of absence.

As we have no information on 24(1) we cannot comment on this provision.  However, reasonable fringe benefits can be paid by the employer during the leave of absence per Regulation 6801(a)(iii)(B).

Paragraph (e)(10) permits an employee to withdraw from the plan for any reason up to 60 days prior to the start of the leave period.  Such a provision may indicate that the main purpose of the plan is not to permit the participant to fund a leave of absence but rather to defer income taxes.  This provision should therefore be amended to permit the employee to withdraw only in the case of financial or other hardship.

It should be noted in the plan that unemployment insurance premiums will be based on the gross salary during the deferral period and will not be payable during the period of leave.

Canada Pension Plan ("CPP") contributions should be based on net earnings, excluding the deferred amounts, during the period of deferral, and on the deferred amounts paid to the employee during the leave of absence.  Where the deferred amounts are paid to the employee by a trustee, 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.  Thus, the employer portion of CPP contributions is required to be paid during the leave period regardless of who pays the employee his deferred amounts during that time.  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 amount otherwise payable to the employee, the amount so recovered will not form part of the employee's gross salary from that employer.

Although the trustee is deemed to be an employer of the employee by the CPP Act, the employee does not enter into new employment with the trustee when he goes on leave.  Consequently, while CPP contributions that are required to be paid during the leave period are to be deducted and remitted by the trustee as by any other employer, those CPP contributions paid in the year prior to the leave period must be taken into consideration by the trustee.  For example, if the required CPP contributions for a year by an employee were $600 and the employee contributed $400 before going on leave, the trustee would be required to deduct and remit CPP contributions for that year of $200 on behalf of the employee, plus the employer's portion.

The trustee will be required to prepare T4s reflecting the amount paid by the trustee to the employees under the Plan and, among other things, the CPP contributions.  However, since CPP contributions made during the year prior to the leave period are to be taken into consideration by the trustee, the amount of contributory earnings reported by the trustee may not coincide with the earnings reported in box "C" for that particular year.  If such is the case, the amount of contributory earnings must be recorded in box "I" of the T4 which should in turn coincide with the amount of contributions reported in box "D".  There may also be instances where the trustee will not have made any deductions for CPP because the employee reached the maximum contributions prior to the leave period.  If such is the case, a check mark should be indicated in box "J" of the T4 under CPP.

If further information is required concerning the trustee's responsibility with respect to CPP contributions or the preparation of T4s etc. the enquiry should be directed to Mr. Pierre M. Paquette at (613) 952-8179 or to the following address:

     Coverage Policy and Legislation SectionSource Deductions Division Revenue Canada Taxation 875 Heron Road Ottawa, OntarioK1A 0L8

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

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate