11 February 1992 External T.I. 9202235 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.

                                        5-920223

     24(1)          D.S. Delorey                                                  (613) 957-8953

Attention:   19(1)

February 11, 1992

Dear Sirs:

Re:  Employee Funded Leave Program

This is with respect to your proposed employee funded leave program ("EFLP"), a copy of which was delivered to the Calgary District Taxation Office on January 7, 1992 and subsequently forwarded to this office for our comments.

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 to register your EFLP or to have it otherwise approved by the Department; rather, all that is necessary is that the EFLP comply with the provisions of paragraph 6801(a) of the Regulations.  It is our view that it will comply with those provisions if the following suggested amendments are made.

1.     Subparagraph 6801(a)(i) of the Regulations provides among other things that the leave period must be for six consecutive months, except where a three consecutive month educational leave is involved.  We therefore suggest that the words "consecutive months" be inserted between the  words "six" and "to" in part 24(1) of the EFLP.      

2.     We suggest that a comment be added to part 24(1) of the EFLP to the effect that the delay cannot extend the maximum six year deferral period mentioned in part 24(1).                    

3.     Subparagraph 6801(a)(v) of the Regulations provides that the employee is to return to his regular employment with the employer, or 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.  Although this requirement is alluded to in part 24(1) of the EFLP, we suggest that it be stated more clearly. 

We assume that the comments in part 24(1) refer to a situation where the employee will return to work for the employer but perhaps to a different department.  If our assumption is correct, we suggest that the paragraph be amended to more clearly state the situation to which it was intended to apply.  If our assumption is incorrect, we suggest that the paragraph be deleted as it could be interpreted to mean that the employee has an option of whether or not to return to work.  It is our view that a plan containing such an option does not meet the requirement set out in subparagraph 6801(a)(v) of the Regulations. 

4.     With respect to the requirement discussed in part 24(1) of the EFLP that interest income is to be paid annually to the participants, we suggest it be stated that such income represents employment income and the trustee should therefore prepare T4s for such income rather than T5s.

5.     We suggest that the following words be added at the end of part 24(1):

          "by the end of the year following the year of death or, where death occurs in the seventh year of participation, by the end of that seventh year".

Canada Pension and Unemployment Insurance

We note the comments in parts 24(1) and 24(1) of the EFLP that unemployment insurance premiums are to be based on the gross salary during the deferral period with no premiums being payable during the leave period, and that Canada pension plan ("CPP") contributions are to be based on the net salary during both the deferral period and the leave period.  The following are additional comments on the Department's position concerning CPP contributions and you may wish to include some or all of them in the EFLP.

When the deferred amounts are paid to the employee by a trustee of the EFLP 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, although 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 OL8

The above comments are an expression of opinion only and are not binding on the Department as explained in paragraph 21 of Information Circular 70-6R2.  We trust, however, that they are of assistance.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate