29 January 1991 External T.I. 903480 F - Voluntary 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.

903480

Subject: Voluntary Leave Plan

Enclosed please find a copy of our reply to  19(1) 24(1)  together with copies of the documents submitted to us by your office.

We are returning the file to your office for action.  However, it should be noted that the 24(1) plan appears to have national application and this should be considered when you take any action.

We would also like to note that the Head Office, Assessing and Enquiries Directorate in co-operation with other interested Directorates, has in recent months developed some policies with respect to "offside" plans getting "onside".  You may wish to contact Mr. Don Wyse at (613) 957-3967 in this regard.

We have reviewed the submission with respect to the 24(1) plan and can advise that the plan would, in our opinion, now be a Retirement Compensation Arrangement ("RCA") as defined in subsection 248(1) of the Income Tax Act.  There are some indications that the plan was intended to be what is now commonly referred to as a Deferred Salary Leave plan as described in Part 6801 of the Income Tax Regulations.  However, to be such a plan, if it was established between an employer and an individual employee before July 28, 1986, contributions must have started before 1987 and it must not have been established to provide benefits on or after retirement but for the main purpose of permitting the employee to fund a leave of absence from employment By virtue of the provisions of Article VIII of the 24(1) plan we must conclude that this last condition is not met.

As an RCA, the 24(1) plan has been subject to a number of new provisions which are discussed at length in the Department's RCA guide.  These rules are applicable after October 8, 1986 except that with respect to a plan or arrangement established before October 9, 1986 or established after October 9, 1986 pursuant to an agreement between a taxpayer and an employer or former employer of the taxpayer entered into before October 9, 1986 (referred to as the "existing arrangement"), for the purposes of the Act,

(a)     another plan or arrangement (referred to as the "statutory arrangement") is deemed to be established on the day that is the earlier of January l, 1988, and the date after October 8, 1986 on which the terms of the existing arrangement have been materially altered;

b)     the statutory arrangement is deemed to be a separate arrangement independent of the existing arrangement;

(c)     the existing arrangement is deemed not to be a retirement compensation arrangement; and

(d)     all contributions made under the existing arrangement after the establishment of the statutory arrangement and all property that can reasonably be considered to derive from those contributions are deemed to be property held in connection with the statutory arrangement and not in connection with the existing arrangement.

In brief, if employees entered into the, 24(1)  plan in 1985 and the plan has not since been materially altered, the law provides that the employees are now members of two plans, an "existing arrangement" which must be treated as an Employee Benefit Plan (an EBP) and a "statutory arrangement" which must be treated as an RCA.

The EPB segment includes all of the contributions made for the years 1985 through 1987 together with any property derived from those contributions.  Employees can not make any further contributions to this segment and the contributions made since December 31, 1987 do not form a part of it.  Otherwise this segment can generally carry on as it was authorized to do in the past, subject to certain comments below.  An employee will be taxable on amounts received out of the EBP but can defer payment through the use of the plan's payout options described in article VIII (b) and (c) of the plan.  To the extent of available funding, this segment may also be used to fund leaves of absence in accordance with the terms of the plan.

The RCA segment of the  24(1)  plan must include all contributions which have been made since December 31, 1987 together with any property derived from them.  The employer and the trustee of the plan have, since that time, been under an obligation to withhold and/or remit, as a special refundable tax, 50% of all contributions and trust income.

Amounts paid out of the RCA segment will be taxable on receipt but the RCA can acquire annuities to fund payments over an extended period.  The RCA segment may also be used to fund leaves of absence of short duration.  However, if this practice becomes too prevalent, the plan might loose its status as being primarily to provide benefits on or after retirement.  If this were to occur the segment might become a salary deferral arrangement as defined in subsection 248(l) of the Act and significant tax consequences could arise.

As noted above, the plan may generally provide benefits as it has in the past subject to the new legislative provisions.  However, we have noted that in accordance with Article VII of the plan the employer is to receive all income earned by the plan but is obliged to re-contribute it to the plan.  Revenue Canada has, since 1985, maintained that in order to be recognized as an income beneficiary, an employer must have unrestricted right, title, and use of the income allocated to it.  A payment that is conditional upon its repayment to the trust would not be accepted as a bona fide payment by the trust; therefore it is the Department's position that such income must be taxed in the hands of the trust.

Notwithstanding that the payments from the EBP trust to the employer are not deductible from the income of the EBP trust, the recontributions by the employer to the plan, if made after December 31, 1987, will be considered to be contributions to a "statutory arrangement" as that term is defined in the coming into force provisions of the RCA definition contained in subsection 248(1) of the Act and therefore subject to withholding provisions of paragraph 153(1)(p) of the Act.  In addition, although any further payments to the employer from the plan will be deemed to be paid first out of the RCA pursuant to paragraph 56(10) of the Act (and therefore included in the employer's income pursuant to paragraph 12(1)(n.3) of the Act to the extent that they are from the RCA), the amounts , as part of a series of payments and refunds of contributions under the RCA, will not apply to reduced the amount of refundable tax otherwise payable by the RCA pursuant to paragraph 207.5(1)(c) of the Act.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate