26 February 1991 External T.I. 910435 F - Earned Leave Policy Proposal

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:  Earned Leave Policy Proposal ("Proposal")

24(1)

Your letter of January  29, 1991,to Mr. Edward Kennedy, Canadian Pension Plan and Unemployment Insurance Rulings, was forwarded to us for reply.  You requested that the above-noted Proposal be reviewed for compliance with the Unemployment Insurance Act and Income Tax Regulations.  (These statutes are addressed in reverse order in the following comments.)  You also requested comments on a "Tax Tip" column which stated that during the leave period the employee cannot be employed elsewhere.

Regulation 6801 (the"Regulation") of the Income Tax Act (the "Act") requires that an employer and employee enter into a written agreement (an "arrangement") setting out the terms and conditions governing the salary deferred.  The Regulation also requires that certain mandatory terms be contained in the arrangement.

The Proposal you have submitted contains some but not all of these terms and, of course, does not constitute an arrangement for proposes of the Act.  The Department will be issuing an advance income tax ruling shortly to outline the standard provisions of an arrangement for purposes of meeting the requirements of Regulation 6801.  In order to assist you, enclosed is a draft of this ruling which you may use as a model for your deferred salary policy.

With respect to the Proposal, please note that the following terms are either missing or do not comply with Regulation 6801:

Missing

A. 

1.        A clause requiring that during the leave of absence the employee may not receive any salary or wages from the employer or from any person or partnership which does not deal at arm's length with the employer.  (See comment at top of page 6 of the annexed draft Ruling).  In answer to your query concerning the "Tax Tips" column, this is the only restriction on employment during leave contained in the Regulation.

2.        A clause describing how the deferred amounts are to be held by the employer on behalf of the employee during the deferred period.  The Regulation permit the deferred amounts to be held by a trust or be a person other than a trust (for example, the employer).

3.        A clause requiring that income earned in the trust or interest accruing on the deferred amounts must be paid out to the employee once in every calendar year.  (See clause 2.3 of the enclosed draft Ruling.  Since such amounts are taxable, you may also wish to include a clause similar to clause 7.3 of the draft Ruling.)

Non-Complying

B.  

1.        Clause concerning interruption by maternity, etc, and clause entitled "Transfers/Promotions" should be qualified to state that in no event will an interruption or re-negotiation be permitted to result in a commencement of the leave of absence more than six (6) years after salary deferrals commenced.  A companion clause should also be inserted indicating that all deferred amounts will be paid to the employee no later than the end of the employee's first taxation year that commences after the end of the period of deferral.  (See, for example, clauses 3.4, 3.5 and 3.2 of the draft Ruling.)

2.        The clauses entitled "Withdrawal from Plan" and "Resignation, Termination or Death" should indicate when the lump sum will be paid, especially in light of the requirements stated in B.1. above.  These amounts are also subject to tax, and this could be indicated as in A.3. above.

With respect to the employee's Canada Pension Plan (CPP) contributions and Unemployment Insurance (UI) premiums, only the CPP contributions are calculated on the reduced salary amounts in both the deferral and leave periods.  Unemployment Insurance premiums, are to be based on the employee's gross salary before deferrals during the period of deferral, and no premiums are to be withheld from the deferred amounts when paid to the employee during the leave period.  (See "Editor's Note" on page 6 of the enclosed draft Ruling.)  Any other questions you have concerning UI and CPP matters should be directed to Mr. Pierre M. Paquette by telephone at (613) 952-8179 or in writing at:

Coverage Policy and Legislation Section Source Deductions Division Revenue Canada Taxation 875 Heron Road Ottawa, Ontario K1A 0L8

We trust these comments will assist you.  Please do not hesitate to contact us if you have any further questions.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate

c.c.:  P.M. Paquette Source Deductions Division