3 September 1991 External T.I. 9117755 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.

5-911775

Dear Sirs:

Re: 24(1) Deferred Salary Leave Plan (the "Plan") Section 6801 of the Income Tax Regulations (the"Regulations")

This is in reply to your letter of June 25, 1991, with an enclosed copy of the above-noted Plan, in which you requested we confirm that the Plan complies with the provisions of section 6801 of the Regulations.  Our review of the Plan indicates that there are a number of deficiencies which should be amended to ensure that the Plan complies with the Regulations.  These include:

1.     A number of provisions of the Plan provide for the earning and payout of interest.  While the Plan may properly refer to these amounts as interest, it is our view that they are employment income for purposes of the Income Tax Act (the "Act") and in consequence, when paid, must be included on an employee's T4 supplementary and be subject to withholdings.

2.     The Plan must specifically provide that a participant must return to his employment after the leave of absence for a period that is not less than the period of the leave of absence.  The Plan may, if it is desired, provide for an employee to return to the employ of another employer which participates in the same or a similar arrangement.

3.     The Plan, in a number of provisions, makes reference  24(1) such references may be appropriate for the administration of the Plan and may, for tax purposes in general, not result in any adverse tax consequences or cause non-compliance with the provisions of section 6801 of the Regulations.  However, caution should be exercised in this regard.  In particular 24(1)

     24(1)

     Subparagraph 6801 (a) (11) of the Regulations, however requires that the percentage deferral in any taxation year of  24(1) must not exceed 33 1/3% of the amount of salary that   24(1)   would normally receive in that year.  A taxation year for an individual is usually the calendar year.  In our view, the provision should be revised to ensure that the maximum percentage deferral allowed will also be limited on a calendar year basis as provided in said subparagraph of the Regulations.

4.     Subparagraph 6801 of the Regulations provides that a leave of absence must commence immediately after the deferral period and that the deferral period must not exceed 6 years from the date on which deferrals are concerned.  In our view the Plan should clearly provide that under no circumstances will a deferral period in excess of six (6) years be allowed.  Should any postponement cause the leave of absence to commence at a later time, the provisions of subparagraph 6801(a)(vi) of the Regulations will have application and all amounts held under the arrangement will have to be paid to 24(1)   no later than the end of the first taxation year that  commences after the end of the six (6) year deferral period.

5.     Clause 4.2 of the Plan provides for the payment of amounts out of the Plan during a leave of absence.  To be complete this provision should provide that all amount hold under the Plan must be paid out no later than the end of the first taxation year of the employee that commences after the end of the deferral period.

6.     Clause 1 of the preamble to the Plan states that its implementation is dependent upon receipt of a favourable advance income tax ruling from Revenue Canada and Clause 8:1 of the Plan makes reference to receipt of a ruling.  Please be advised that this letter is not an advance income tax ruling, as appears to be contemplated by the above provisions, but is merely a statement of opinion on the specifics of your proposed Plan and it is not binding upon the Department.

     While in our view an advance income tax ruling should not be necessary if the Plan is amended as discussed above, should you still desire one, we must advise that it may only be provided when the procedures for its request are complied with.  A proper request entails the provision of all related documents for our review as well as an identification of all of the specific provisions of the Act in respect of which the request is to be considered.  The procedures are discussed at length in our Information Circular 70-6R2, a copy of which is attached for your information.

Comments

The following comments with respect to Canada Pension Plan and Unemployment Insurance Premiums are for clarification purposes only.

It is the Department's position that Canada Pension Plan ("CPP") premiums 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.

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) 952-5433 or to the following address:

Coverage Policy and Legislation SectionSource Deductions DivisionRevenue Canada Taxation 875 Heron RoadOttawa, OntarioK1A OL8

It is also the Department's position that Unemployment Insurance Premiums are to be based on the participant'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 participant during the leave period.

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

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate