11 December 1991 External T.I. 9126655 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.

5-912665

Dear Madam:

Re:  Deferred Salary Leave Plan

This is in reply to your letter of September 10, 1991 concerning your proposed deferred salary leave plan (the "Plan").

The provisions that govern deferred salary leave plans are contained in paragraph 6801(a) of the Regulations to the Income Tax Act (the "Regulations"), a photocopy of which is enclosed for your information.  It is not necessary, as suggested in your letter, to register your Plan with the Department or have it approved by the Department.  All that is necessary is that the Plan comply with the provisions of paragraph 6801(a) of the Regulations.  Our review of your Plan indicates that it generally complies with those provisions.  We do, however, have the following  comments:

1.        With respect to clause 24(1) of the Plan concerning the interest to be paid to a participant by a financial institution on or before December 31 of each year, such interest represents employment income and the financial institution should therefore issue T4s for this interest.  We suggest that you include this comment in your Plan to avoid any misunderstanding.

    The comment at the bottom of page 24(1) of the Plan suggests that there is an alternative to paying out the interest by December 31 of each year.  Since there is no such alternative in paragraph 6801(a) of the Regulations, we suggest that this comment be deleted.

2.        Subparagraph 6801(a)(vi) of the Regulations provides that all funds held for a participant's benefit must be paid to the participant no later than the end of the first taxation year that commences after the end of the deferral period.  Although the terms of your Plan indicate that this requirement will be met, we suggest for greater certainty that you specifically refer to it,  perhaps in clause 24(1) of the Plan.

3.        Subparagraph 6801(a)(i) of the Regulations provides that the leave of absence is to commence immediately after the deferral period, with no exceptions.  The comment  24(1) at the beginning of clause 24(1) could be interpreted as an exception to this requirement and we therefore suggest that it be deleted.

4.        The following comments reflect the Department's position concerning unemployment insurance premiums and Canada pension plan ("CPP") contributions.  You may wish to include some or all of the comments in the Plan.

    Unemployment insurance premiums are to be based on the gross salary during the deferral period and are not payable during the leave period.

    CPP contributions are to be based on the employee's salary net of the deferred amounts during the deferral period 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 K1A 0L8

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 on the Department.  However, provided the Plan is amended as noted above, it is our opinion that the Plan will meet the requirements of paragraph 6801(a) of the Regulations.

We trust that our comments will be of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate