23 June 1993 External T.I. 9313385 F - Deferred Salary Leave Plan Return to Work

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 Sirs:

RE:  Early Retirement and Deferred Salary Leave Plans

This is in reply to your letter of April 29, 1993, in which you requested clarification of the "return to work" conditions for Deferred Salary Leave Plans ("DSLPs").

Section 6801 of the Income Tax Act Regulations (the "Regulations") sets out the following terms and conditions for DSLPs:

Subparagraph 6801(a)(i) of the Regulations requires that the arrangement to defer salary must be established to permit the employee to fund a leave of absence from employment and not to provide benefits on or after retirement. The leave of absence to be taken by the employee must be for at least three consecutive months if it is taken for the purpose of permitting full-time attendance at a designated educational institution. In any other case, it must be for at least six consecutive months.

Subparagraph 6801(a)(v) of the Regulations states that the arrangement must provide that the employee return to regular employment with the employer after the leave of absence for a period equal to the leave of absence. Subparagraph 6801(a)(vi) of the Regulations provides that deferred amounts must be paid out no later than the end of the calendar year commencing after the deferral period ends.

Given these conditions, it is mandatory that a DSLP prohibit an employee from withdrawing from the plan at will, and an employer must be prepared to ensure a proposed deferral period will end sufficiently in advance of any planned retirement by an employee.

If, at the time of an arrangement's creation or at a later date, it is reasonable to assume that the parties to the contract do not intend to abide by the provisions of the plan pertaining to the employee's return to work, the arrangement between the employer and the employee will not be or will not continue to be a prescribed plan and could be subject to the salary deferral arrangement rules from its inception. However, where it is reasonable to expect that an employer and an employee intended to fulfil a commitment but the employee, because of changed circumstances, decided to leave his employment, the Income Tax Act will not impose any penalty for failing to comply with the agreement with the employer.

We trust the above comments will be of assistance to you.

Yours truly,

for Director  Financial Industries DivisionRulings Directorate