19 November 1991 External T.I. 9120435 F - Salary Deferral Arrangement 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:    Section 6801 of the Income Tax Regulations (the "Regulations")

This is in reply to your letter of July 19, 1991, with an enclosed copy of the above-noted Plan, ln 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:

l.     The Plan must specifically provide that a participant must return to his/her 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.

2.     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 benefit.

Subparagraph 6801(a)(i) of the Regulations provides that a leave of absence must commence immediately after the deferral period of absence and that the deferral period must not exceed 6 years from the date on which deferral are commenced.  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 the employee no later than the end of the first taxation year that commences after the end of the six (6) year deferral period.

4.     The Plan should indicate that it is not established to provide benefits to the participants on or after retirement.

5.     Pursuant to subparagraph 6801(a)(vi) of the Regulations, the Plan must provide that any interest or additional amounts that may reasonably be considered to have accrued for the benefit of the employee in a year must be paid in that year to the employee.  These amounts are to be treated as employment income for the purposes of the Income Tax Act.

In consequence, the amounts, when received, must be included on the employee's T4 supplementary and the usual tax withholdings and remittances must be made.

6.     It is the Department's position that Unemployment Insurance Premiums are to be based on the employee's gross salary 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.

7.     The Plan must provide that an employee may not withdraw from the Plan in circumstances other than financial or other hardship, otherwise it may indicate that the main purpose of the Plan is to defer taxes rather than permit employees to fund a leave of absence.

8.     Subparagraph 6801(a)(ii) of the Regulations requires that the percentage deferral in any taxation year of the employee shall not exceed 33 l/3% of the amount of salary that the employee would normally receive in that year.  A taxation year for an individual is usually the calendar year.  The Plan should indicate such maximum and that it will be limited on a calendar basis.

9.      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 Section Source Deductions Division Revenue Canada Taxation 875 Heron Road Ottawa, Ontario KlA OL8

Please be advised that this letter is not an advance income tax ruling 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 desire one, we will be pleased to again review your Plan upon its amendment and issue a ruling thereon provided your request is made in the manner outlined in Information Circular 70-6R2, a copy of which is attached for your convenience.  It is to be noted that there are no requirements to register such plans or employees in such plans with the Department.

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

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate