8 March 1991 Internal T.I. 903479 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.

Dear Sirs:

Re:  Deferred Salary Leave plan (the "Plan")

This is further to your letter of November 5, 1990 addressed to the Halifax District Office which was forwarded to us for reply.  A copy of your Plan was attached to your letter.

You have requested that we confirm that the content of the Plan complies with the provisions of sections 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.

1.     The Plan must provide that, in the event the employee does take his/her leave of absence in the designated period, the deferred amounts will be paid to the employee in the first taxation year that commences after the end of the deferral period.  Paragraph 8 of the Plan should be amended accordingly.

2.     Subparagraph 9(b) of the Plan should be amended to indicate that the amendment will be subject to subparagraph 6(e) (as amended).

3.     Subparagraph 6(e) of the Plan should be revised to ensure that the maximum percentage deferral allowed (331/3%) will be limited on a calender year basis as provided in the Regulations.

4.     Pursuant to subparagraph 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.     It is the Department's position that Unemployment Insurance Premiums are to be based on the employee's gross salary during the period of the deferral and no premiums are to be withheld from the deferred amounts when paid to the employee during the leave period.  Subparagraph 6(b) of the Plan should be amended accordingly.

6.     As far as Canada Pension Plan ("CPP") premiums are concerned, they are to be based on the employee's salary net of the deferred amounts during the period of deferral and on the deferred amounts when paid to the employee during the leave period.  When the deferred amounts are paid to the employee by a trustee of the Plan during the leave period, that trustee is deemed by the CPP Act to be an employer of the employee and is therefore required to pay the employer's CPP contribution in respect of that employee.  Where the trustee/employer recovers the employer's CPP contribution from amounts otherwise payable to the employee, it is our view that this recovered amount will not be part of the employee's gross salary from that trustee/employer and therefore need not be included on the employee's T4 slip.

     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, 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 Plans 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.

7.     Subparagraph 6(a) of the Plan should be amended to provide that interest earned and attributable to an employee in a year must be paid in that year to the employee as employment income.  Clause 6801(a)(iv)(B) of the Regulations provides that where deferred amounts are held by or for the account of any person other than a trust referred to in Clause 6801(a)(iv)(A) of the Regulations, any amount in respect of interest or other additional amounts that may reasonably be considered to have accrued to or for the benefit of the employee to the end of a taxation year must be paid in the year to the employee.

While the Plan may properly refer to these amounts as accrued interest, it is our view that they are employment income for purposes of the Act.  In consequence, the amounts, when received, must be included on the employee's T4 supplementary and will be subject to withholdings by the employer.

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

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate