1 April 1992 Income Tax Severed Letter 9208445 - Self Funded 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: SELF FUNDED LEAVE PLAN SECTION: REG 6801]

XXX 5-920844
P. Spice
(613) 957-8953

Attention: XXX

April 1, 1992

Dear Sirs:

Re: Self-Funded Leave Plan

This is in reply to your letter of March 18, 1992, in which you ask us to review your policy (copy enclosed with your letter) with respect to the above-noted Plan.

We reviewed the terms of the policy and have the following comments:

• Clause 1.1 - The maximum percentage of salary which may be deferred is based on the annual salary over a calendar year. The wording could be clarified to indicate that the annual maximum percentage of salary that can be deferred in any one calendar year is 33 1/3%.
• It should also be specified that the leave period must commence immediately after the period during which the salary is deferred.
• Clause 1.2 - During the leave of absence, the employee cannot receive salary or wages from the employer or from any person or partnership related to the employer. "Person" includes an individual, corporation or trust. This prohibition should be added.
• Clause 5.1 - Although you have indicated that the interest income should be reported on a T4, perhaps it should be noted that the reporting must be done annually.
• The policy permits interest to be paid out or retained in the trust account. Please note that if the interest is retained in the account, it will be considered a contribution by the employee to the Plan. Interest income earned on these amounts will also be considered to be employment income and must be reported annually by the employee. All amounts received out of the Plan, both the annual income earned in it and the amounts paid out during the year of leave, will be considered to be employment income except for the previously taxed employee contributions to the Plan which are not taxable when returned. Pensionable income for purposes of the Canada Pension Plan is the net income including the interest earned in the Plan. Income for the purposes of the Unemployment Insurance Act is gross income when earned but does not include interest earned in the Plan. The interest income would not be considered part of the salary and wages used to calculate the 33 1/3% maximum for annual deferrals.
• Clause 5.4 - A phrase should be added to the sentence to indicate that the salary will be paid out no later than December 31st of the year following the period during which the salary was deferred.

If your revise your policy in accordance with these suggestions, your Plan will be in conformity with the requirements imposed by the Income Tax Act with respect to self-funded leave plans. We hope we have been of assistance. Enclosed for your information is ATR-39, "Deferred Salary Leave Plan", which describes a plan which contains the elements required for compliance with the Income Tax Act Regulation.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate