22 March 1993 External T.I. 9302325 F - Deferred Salary Leave Program

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear XXXXXXXXXX

Subject:  Self Funded Leaves of Absence for Members (the "Plan") XXXXXXXXXX

This is in response to your letter of December 17, 1992, received on January 28, 1993, with an enclosed copy of a proposed plan. You have requested an advance income tax ruling in respect of the above Plan.

As explained in a telephone conversation (XXXXXXXXXX/St-Amour) an advance income tax ruling, which when given is binding upon the Department, may only be provided when the procedures for its request are complied with. A proper request entails the provision of all related documents for our review as well as an identification of all of the specific provisions of the Income Tax Act (the "Act") in respect of which the request is to be considered. The procedures are discussed at length in our Information Circular IC 70-6R2, a copy of which is attached for your reference.

While we cannot, at this time, provide a ruling, we can provide our comments in respect of your Plan. Section 6801 of the Income Tax Regulations (the "Regulations") (copy enclosed) must be complied with in order for a plan to be exempted as a prescribed plan from the salary deferral arrangement provisions of the Act. In considering its application to your Plan, we note the following:

1.     Pursuant to subparagraph 6801(a)(i) of the Regulations, the Plan should indicate clearly that it is not established to provide benefits to the participants on or after retirement.

The Plan must specify that the minimum leave of absence shall be for a period of six (6) consecutive months. A leave of absence can be for a period of three months if the leave of absence is to be taken by the participant for the purpose of permitting the full time attendance of the participant at a designated educational institution.

The Plan must provide that the leave of absence is to commence immediately after the deferral period and such deferral period must not exceed six (6) years from the date on which deferrals are commenced. In this regard, we note that paragraphs XXXXXXXXXX and XXXXXXXXXX of the Plan provide that the employer may delay the leave of absence. Perhaps it was intended that the employer would be allowed to extend the deferral period, which is acceptable provided the deferral period is not extended beyond the six year limit set out in subparagraph 6801(a)(i) of the Regulations.

2.     Pursuant to subparagraph 6801(a)(iii) of the Regulations, the Plan must provide that throughout the leave period the participant will not receive any salary or wages from the employer, or from any other person or partnership with whom the employer does not deal at arm's length, other than the deferral amounts and reasonable fringe benefits the employer usually pays. If a participant must appear in court during the leave of absence and is paid for those services, it is the Department's view that this is in contravention thereof. However, the Department would accept that the participant be granted time off, as a fringe benefit, following his/her return to work after the leave of absence. Time off may be calculated as for employees who are required to appear in court on their regular days off.

In addition, the Department does not consider that vacation shall accrue during the leave of absence and that the participant be entitled to statutory holidays. The Department does not consider that these benefits are part of "reasonable fringe benefits" as contemplated by clause 6801(a)(iii)(B) of the Regulations, that the employer usually pays to or on behalf of employees.

3.     Pursuant to subparagraph 6801(a)(v) of the Regulations, the Plan must provide that a participant 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 a participant to return to the employ of another employer which participates in the same or similar arrangement.

4.     Pursuant to subparagraph 6801(a)(vi) of the Regulations, 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.

Comments

The following comments reflect the Department's position concerning unemployment insurance premiums and Canada Pension Plan ("CPP") contributions. The following applies to the Plan except to the provisions of paragraph XXXXXXXXXX. 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.

A stated above, this letter is not an advance income tax ruling but is merely a statement of opinion on the specifics of your proposed Plan and in not binding on the Department. However, should your Plan be amended as indicated above, it is our opinion that it will meet the requirements of paragraph 6801(a) of the Regulations.

We trust our comments will be of assistance. If you have any questions do not hesitate to contact us.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate