9 November 1993 Income Tax Severed Letter 9325835 - 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.

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.

                                           5-932583
XXXXXXXXXX                                 D. S. Delorey
                                           (613) 957-8953

Attention: XXXXXXXXXX

November 9, 1993

Dear Sirs:

Re: XXXXXXXXXX Deferred Salary Leave Plan

This is in reply to your letter of September 2, 1993 concerning the XXXXXXXXXX deferred salary leave plan (the "Plan").

We would first like to mention that there are no provisions under the Income Tax Act or the Income Tax Regulations (the "Regulations") requiring the Plan to be approved by this Department or by any other person. All that is required is that the Plan meet the requirements of paragraph 6801(a) of the Regulations, a copy of which is enclosed.

We note the reference in your letter to a "ruling". Binding advance income tax rulings are given only where the particular plan is the subject matter of a request submitted in the manner set out in the enclosed Information Circular 70-6R2. The current hourly fee for such a ruling is $90 and the minimum deposit is $450 plus $31.50 GST. The following thus represents non-binding comments on the status of the Plan.

The Plan for the most part meets the requirements of paragraph 6801(a) of the Regulations. We note, however, the following deficiencies:

1. Subparagraph 6801(a)(ii) provides that the maximum amount deferrable in a taxation year cannot exceed 33 1/3% of the salary that the participant would reasonably have been expected to have otherwise received in the year. An individual's taxation year is the calendar year. Although the maximum deferral under the Plan is 30%, we note the reference in the Plan to "school" year. To ensure conformity with this requirement, we suggest that clause XXXXXXXXXX be amended to state that the deferred compensation in a calendar year cannot exceed 30% of the salary or wages that the participant would otherwise have received in the calendar year.

2. Subparagraph 6801(a)(iv) requires that interest earned in a calendar year be paid to the participant by the end of the year. We suggest that a comment to this effect be included in clause XXXXXXXXXX. Also, it should be stated that the interest is employment income and must be reported on a T4 rather than a T5.

3. Subparagraph 6801(a)(i) provides that the arrangement must be established for the main purpose of permitting the participant to fund a leave of absence. Notwithstanding the reason stated in clause XXXXXXXXXX it is our view that given this requirement, an arrangement should prohibit the participant from withdrawing at will since such a procedure could be used to shelter income for other purposes. The wording of clause XXXXXXXXXXshould thus be amended to state that withdrawal will be permitted, at the discretion of the Board, only in the event of financial or other hardship.

Also to ensure conformity with this requirement, we suggest that it be stated in the Plan that the deferral of salary is not to fund the participant's retirement, and that the MEMORANDUM OF AGREEMENT contain a statement to this effect. This will indicate to an employee that the Board will not allow participation in the Plan where it is likely that the employee will retire before the end of the leave period.

4. Subparagraph 6801(a)(iii) requires that throughout the period of leave the employee 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 deferred amounts and reasonable fringe benefits usually paid by the employer. We suggest that this requirement be stated in the Plan.

5. Subparagraph 6801(1)(v) provides that "the employee is to return to his regular employment ......". We interpret this to mean that if a teacher was employed full time before going on leave, he or she should return to full time employment after the leave. It is not clear from a reading of clause XXXXXXXXXX that this requirement is met. We therefore suggest that the wording be appropriately amended.

If the Plan is amended at noted above, it is our opinion that it will meet the requirements of paragraph 6801(a) of the Regulations.

In reviewing the MEMORANDUM OF AGREEMENT, we note that in XXXXXXXXXX "may" should be "my".

You may wish to include in your Plan the following comments concerning Canada Pension Plan contributions and unemployment insurance premiums.

Canada Pension Plan ("CPP")

It is the Department's position that 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 $700 and the employee contributed $500 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 ("UI")

It is the Department's position that UI 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.

As stated above, this letter is not an advance income tax ruling but is a statement of opinion on the specifics of your Plan and it is not binding on the Department. We trust, however, that our comments are of assistance.

Yours truly,

for Director Financial Industries Division Rulings Directorate

HAA7680-4.2