29 November 1991 External T.I. 9129415 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.

5-912941                               

Dear Sirs:

Re:  Deferred Salary Leave Plan (the Plan)

This is in reply to your letter of September 24, 1991, with an enclosed copy of the above-mentioned Plan for which you request our review and approval as an acceptable deferred salary leave plan in accordance with the provisions of paragraph 6801(a) of the Income Tax Regulations (the "Regulations").

A deferred salary leave plan does not have to be approved by the Department in order for it to comply with the provisions of section 6801 of the Regulations and no registration numbers are issued in respect of them.  However, a confirmation that your Plan meets the provisions of section 6801 of the Regulations can be obtained in the form of an advance income tax ruling if you so desire and a request for it is submitted in the manner set out in Information Circular 70-6R2, a copy of which is enclosed.

This letter is not an advance income tax ruling but is a statement of opinion on the specifics of your proposed Plan and as such is not binding on the Department.  We have, however, reviewed your Plan and are of the opinion that it will be a prescribed plan under paragraph 6801(a) of the Regulations provided it is amended and/or administered as follows:

1.     The Plan,in a number of provisions, makes reference to the school year.  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, Clause  24(1)of the Plan provides that a teacher may, in respect of each school year, defer a percentage of his or her current compensation amount not in excess of 33 1/3% per year, subject to limits set out therein, for a maximum of six school years.  Subparagraph 6801(a)(i) of the Regulations, however, requires that the percentage deferral in any taxation year of a participant must not exceed 33 1/3% 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 and accordingly, in our view, the provision should be revised to ensure that the maximum percentage deferral allowed will also be limited to 33 1/3% on a calendar year basis.

2.     Clause 24(1) of the Plan provides that the interest earned will be paid out to a participant on December 31st of each year in which the participant is a member of the Plan so long as the Plan is considered by Revenue Canada Taxation to be an investment contract.

Please be advised that in accordance with the provisions of Regulation 6801(a) all amounts of interest earned by or under the Plan must be treated as employment income for purposes of the Income Tax Act and must be paid out of the Plan to the participants annually on December 31.  In consequence, the amounts, when paid, must be included on the employee's T4 supplementary and the usual tax withholdings and remittances must be made by the employer.

3.     Clause 24(1) of the Plan which provides that a participant is not to receive regular salary from the employer, other than amounts paid under the plan, should be extended to also deny the payment of salary from any person with whom the employer does not deal at arm's length.

We also note that the paragraph refers only to "regular salary" and provides that "regular salary" does not include "Sabbatical Leave".  Please be advised that the provisions of subparagraph 6801(a)(iii) of the regulations do not permit the payment of any salary or wages to a participant during the leave of absence period except for amounts paid in accordance with the plan and any reasonable fringe benefits that an employer usually pays on behalf of its employees.  Accordingly the limited restrictions of your provision would be unacceptable.

4.     Clause 24(1) of the Plan is in error in that the Regulations do not require amounts to be paid out in the seventh year.  The Regulations require that a deferral period may not exceed six years in duration and that all amounts held under the Plan must be paid out by the end of the first taxation year which commences after the deferral period what ever its length.  A year of a deferral period may or may not coincide with a calendar year.

Clause 24(1) may more appropriately be worded to indicate that notwithstanding clauses 24(1) or any combination thereof, a deferral period may not be extended to exceed six years in duration.

5.     Clause 24(1) of the Plan provides for withdrawal from the Plan.  We suggest that, to be more precise, the clause should provide that withdrawal may only be approved where it is reasonable in the circumstances such as for financial or other hardship.

6.     The Plan provides that amounts will be paid out within 60 days in the event of withdrawal from the Plan under clause 24(1) or on the participant's death under clause 24(1).  To comply with subparagraph 6801(a)(vi) of the Regulations, the Plan must also provide that notwithstanding these provisions or any other provision, all amounts will be paid out of the Plan no later than the end of the first taxation year that commences after the end of the deferral period.

7.     Clause 24(1) of the Plan provides that a leave of absence may not be less than six consecutive months in duration.  Please note that the Regulations were recently amended so that leaves of absence may also be taken for periods of not less than three consecutive months if the purpose is to attend full-time at a "designated educational institution" (as defined in subsection 118.6(1) of the Act).  Such an extension is not mandatory but could be added to your Plan at your option.

8.     Under the Regulations, the board could, if it so desired, extend the provisions of Clause 24(1) to indicate that an employee may also return to his regular employment with the employer or with an employer that participates in the same or a similar arrangement after the leave of absence for a period that is not less than the period of the leave of absence.

9.     With respect to clause 24(1) of the Plan please note that 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 Plan 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.

For your assistance, please find enclosed the Department's publication 39 which describes a deferred salary leave plan that complies with the requirements of the Act.

We trust the foregoing comments will assist you.Yours truly,

for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch