11 January 1991 Income Tax Severed Letter 9029645 F - Deferred Salary 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.

5-902964

Dear Sirs:

Re:  Deferred Salary Leave Plan 24(1) 24(1) the "Plan")

This is in reply to your letter of September 24, 1990 wherein you requested our opinion as to whether the Plan would qualify as a prescribed plan in accordance with section 6801 of the Income Tax Regulations (the "Regulations").

Our review of the provisions of 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.     The Plan, in a number of provisions, makes reference to the school year.  Such reference may be appropriate for the administration of the Plan and may for tax purposes in general not result in any adverse tax consequences or give non-compliance with the provisions of regulation 6801.  Caution, however, should be exercised in this regard.  In particular, clause 3.1 and 3.2 of the Plan should be amended to ensure that the maximum percentage deferred allowed will not exceed 33 1/3% of the amount of salary that the teacher would receive on a calendar year basis.

2.     Clause 4.3 should be revised to provide that, pursuant to paragraph 6801(a)(iii) of the Regulations, 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.

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.     It should be noted that the Plan must not be established to provide benefits to the employee upon retirement.

We will provide the following comments with respect to Canada Pension Plan ("CPP") contributions.  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 amounts 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 under the CPP Act to be an employer, 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 Section Source Deductions Division Revenue Canada Taxation 875 Heron Road Ottawa, Ontario K1A 0L8

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate