21 July 1993 External T.I. 9318625 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.

XXXXXXXXXX  

Attention:  XXXXXXXXXX

Dear XXXXXXXXXX

RE:  XXXXXXXXXX Deferred Salary Leave Plans ("DSLPs")

This is in reply to your letter of June 21, 1993, in respect of the above noted plan.

We have reviewed the proposed plan and have determined that a number of amendments should be made before the plan will comply with the Income Tax Regulations (the "Regulations") governing deferred salary leave plans. Those noted include the following:

1.     XXXXXXXXXX; Definition of Deferred Compensation Amount.

Under this definition, your plan provides for the contribution of amounts to the plan trustee by participants under the plan.

Regulation 6801(a) provides that the main purpose of a DSLP must be to permit the employee to fund a leave of absence through salary or wage deferrals. In our opinion, a plan which permits employees to make contributions in addition to normal salary deferrrals will not satisfy this requirement and we therefore suggest that the provision be deleted.

While a plan can not permit employee contributions as a means of funding, the Department will allow income earned within a plan to be retained in a plan as participant contributions, where there would otherwise be problems in the year end administration of the plan or in the distribution of its income.

2.     XXXXXXXXXX Payment of Accrued Interest XXXXXXXXXX of appendix "A"

The plan provides in this section that all income earned in the trust will be paid on December 31 of each year and all income accrued if any for that year for which a participant is obliged to pay tax by virtue of section 12(4) of the Income Tax Act (the "Act").

The provisions of the Act do not permit the treatment of any income under a DSLP as income from property such that any income under the plan represents employment income rather than income from property and must be paid and reported to a participant under a plan as employment income. Form T4 should be used by the trustee or the employer as the case may be to report the earnings and the usual withholdings and remittances must be made.

In this respect we also draw your attention to the following comments with respect to Canada Pension Plan and Unemployment Insurance Obligations

Canada Pension Plan ("CPP")

It is the Department's position that CPP premiums 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 a 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 Plan 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) 952-5422 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 ("UIC")

It is the Department's position that UIC premiums are to be based on the participant's gross salary before deferrals during the period of deferral and no premiums are to be withheld from the deferred amounts when paid to the participant during the leave period.

3.     Amount of Payment during Leave

This provision must be extended to indicate that during the leave period, the employee can not receive any salary or wages from the employer or any other person or partnership with whom the employer does not deal at arm's length, other than the deferred amounts and reasonable fringe benefits.

4.     XXXXXXXXXX Not to Prejudice Ruling

Please note 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 is not binding on the Department as explained in paragraph 24 of the enclosed Information Circular 70-6R. If you wish to obtain a ruling your plan should be amended as indicated above and submitted as indicated in the circular.

We also note that in XXXXXXXXXX the word "not" should proceed the phrase "Salary Deferral Arrangement".

We trust our comments are of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate