17 March 1993 External T.I. 9238845 F - DSLP

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.

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Attention:  XXXXXXXXXX

RE:  Deferred Salary Leave Plan (the "Plan") Section 6801 of the Income Tax Regulations (the "Regulations ")

This is in reply to your letter of December 14, 1992 with an enclosed copy of the proposed Plan and Guidelines.

In your letter you state that the implementation of the Plan is dependent upon the approval of Revenue Canada. There are no provisions under the Income Tax Act or the Income Tax Regulations requiring your Plan to be approved by this Department. All that is required is that the Plan meet the requirements of paragraph 6801(a) of the Regulations.

Our review of the Plan indicates that there are a number of deficiencies which should be amended to ensure that the Plan complies with the Regulations. These include:

1.     Clause 6801(a)(i)(A) of the Regulations provides that a leave of absence can be for a period of three consecutive months if the leave of absence is to be taken by the employee for the purpose of permitting the full time attendance of the employee at a designated educational institution. In any other case, the leave of absence must be for a period of not less than six consecutive months.

2.     The Plan must specifically provide that an employee must return to his/her regular employment after the leave of absence for a period that is not less than the period of the leave of absence. The Plan may, if it is so desired, also provide for an employee to return to the employ of another employer which participates in the same or a similar arrangement.

3.     A number of provisions of the Plan provide for the earning and payout of interest. While the Plan may properly refer to these amounts as interest, it is our view that they are employment income for purposes of the Income Tax Act and in consequence, when paid, must be included on an employee's T4 and be subject to the required withholdings. The interest earned and attributable to an employee in a year must be paid in that year to the employee as employment income.

4.     The Plan must provide that throughout the period of leave of absence, the employee does not receive any salary or wages from the employer or from a person with whom the employer does not deal at arm's length other than the amount by which the employee's salary under the Plan was deferred or is to be reduced and reasonable fringe benefits.

5.     The Plan must provide that, in the event the employee does not take his/her leave of absence in the designated period, the deferred amounts will be paid to the employee in the first taxation year that commences after the end of the deferral period.

6.     The plan provides that amounts will be paid out within "a reasonable period of time" not exceeding 4 months in the event of withdrawal under paragraph l) and no later than 7 days in the event of termination under paragraph m). 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.     The Plan provides that the employee may withdraw from the Plan "at any time" during the deferred period by giving a three months notice. A voluntary withdrawal provision of this nature may indicate that the main purpose of the Plan is not to permit the employee to fund a leave of absence but rather to defer income taxes. The Plan should be amended to provide an employee with the right to withdraw from the Plan only in the case of financial or other hardship, or upon termination of employment.

8.     The Plan must provide that the leave of absence is to commence immediately after the deferral period and the deferral period cannot exceed six years. We suggest for greater certainty that a reference be made to the effect that these requirements must be met in all situations. Should any postponement cause the leave of absence to commence at a later date, the provisions of subparagraph 6801(a)(vi) of the Regulations will have application and all amounts held under the arrangement will have to be paid to the employee no later than the end of the first taxation year that commences after the end of the six year deferral period.

Comments

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 proposed Plan.

CPP contributions 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 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)952-8179 or to the following address:

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

Unemployment insurance premiums are to be based on the employee's gross salary during the deferral period and no premiums are to be withheld from the deferred amounts when paid to the employee during the leave period.

If the Plan is amended as discussed above, it is our opinion that it will meet the requirements of paragraph 6801(a) of the Regulations. You are 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.

We trust our comments will be of assistance.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate