10 January 1992 Income Tax Severed Letter 9133145 - 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: DEFERRED SALARY LEAVE PLAN Section(s): REG 6801]

• 5- 913314 D. Duff (613) 957-8953

XXX
Attention: XXX

January 10, 1992

Re: Deferred Salary Leave Plan ("Plan")

This is in response to your letter of November 28, 1991 requesting our opinion on whether your Plan complied with the Regulations in the Income Tax Act ("Act").

Such plans are prescribed by Regulation 8801 of the Act to be excluded from the definition of a salary deferral arrangement ("SDA") as defined in subsection 248(1) of the Act. If a plan is an SDA the deferred amounts would be included in the employee's income in the year earned regardless of when they are received. The provisions in Regulation 6801 are specifically intended to permit an employee to fund, through salary deferrals, a leave of absence from his employment. If a plan meets the criteria in Regulation 6801 it is considered not to be an SDA and, consequently, the deferred amounts will not be included in income until they are received.

We have reviewed the agreement between XXX which outlines the provisions of the Plan, and we have the following comments.

The Plan should state that it is being established for the purpose of funding a leave of absence from employment. For greater certainty the Plan should also state that it is not for the purposes of providing benefits on retirement. In this regard we note that XXX permits the employee to buy a life annuity at the start of his leave period. This provision suggests that the Plan may not have been established for the purpose of funding a leave of absence and, consequently, may not meet the requirements of Regulation 8801. Furthermore, if a life annuity was purchased the full amount of the cost would be included in the income of the employee as employment income just as if it was paid directly to him.

Subparagraph 6801(a)(vi) requires that all amounts must be paid out of the Plan before the end of the first taxation year that commences after the end of the deferral period. We note that the Plan does not have this requirement. Subparagraph 6801(a)(i) requires the leave period to be at least six months, unless the leave is for full time attendance at a designated educational institution, in which case it cannot be less than three months. We note that your Plan does not have a minimum leave requirement.

The Plan should also state that the maximum deferral period is six years. This is not clearly stated, although it does state that the employer cannot defer the leave to seven years after the start of the deferrals.

We note that the Plan does not have a maximum period of leave which is unusual. Although Regulation 6801 does not stipulate a maximum period, it does require the employee to return to work for a period equal to the period of leave.

The Plan's position regarding Canada Pension Plan (CPP) contributions, as stated XXX, is correct, but we would like to add a few comments. The employer portion of CPP contributions is required to be paid during the leave period regardless of who pays the employee his deferred amounts during that time. If the employee is to pay both his portion and the employer's portion during the leave period (a matter to be arranged between the employer and the employee) and the employer recovers the employer's portion from amounts otherwise payable to the employee, the amount so recovered will not form part of the employee's gross salary from that employer.

If further information is required concerning CPP contributions or the preparation of T4s, the enquiry should be directed to Mr. Pierre M. Paquette at (613) 954-2522 or to the following address:

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

If the Plan is adjusted to correct the aforementioned problems it is our opinion that it will not contravene the provisions in Regulation 8801. For your convenience, we have included a copy of Advance Tax Ruling ATR-39 which illustrates a Deferred Salary Leave Plan.

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

Yours truly,

for Director
Financial Industries Division
Rulings Directorate