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: Advance Income Tax Ruling XXXXXXXXXX Deferred Salary Leave Plan
This is in reply to your letter of September 9, 1993, requesting an advance income tax ruling in respect of the above noted plan (the "Plan")
We have reviewed your submission 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. These are as follow:
1. Section 6801 of the Regulations which governs Deferred Salary Leave Plans ("DSLPs") provides that an acceptable arrangement is an arrangement in writing between an employer and an employee which includes the conditions prescribed in the regulation. Administratively, we will also accept an arrangement when the required terms are contained in a written master document and the employer and employee enter into a separate agreement under which they agree to abide by the terms in the master.
To be acceptable, it is our opinion that your arrangement should be written in a form that contains all of the required provisions. For your assistance, please find enclosed a copy of the Departments Advance Tax Ruling ATR-39.
2. In your Plan documentation it states that employees must provide written notice of their intent not to return to work should circumstances dictate that they are unable to return.
Subparagraph 6801(a)(v) states that the arrangement must provide that an employee has to return to his regular employment with the employer or an employer that participates in the same or a similar arrangement after the leave of absence for a period that is not less than the period of the leave of absence. (Please note paragraph 6.1 of ATR-39.)
We also note that the employee's return to work is subject to the conditions of XXXXXXXXXX Since we do not know the nature of this article, we can not determine whether or not the Plan conforms to the Regulations.
3. Your plan provides that interest earned on the deferred salary amounts will be deposited into a savings account on behalf of each employee and will be available to the employee at any time.
While in itself this provision is acceptable, it should be noted that the plan must provide that all interest or other additional amounts that accrue to the benefit of an employee to the end of a taxation year must be paid to the employee in the same year. Accordingly any interest credited to a bank account on behalf of an employee must be reported as income by the employee in the year it is accrued. You should also note that this income is considered income from employment and must, therefore, be reported on a T4 supplementary and be subject to normal withholdings at source. (See paragraphs 2.3 and 7.3 of ATR-39.)
4. With respect to the postponement of leave, the plan must provide that the leave period will immediately follow the deferral period. The Department will however allow the postponement of the leave as provided by your proposed plan. (See paragraphs 3.4, 3.5 and 3.6 of ATR-39.)
5. With respect to withdrawals from the Plan your proposal states:
XXXXXXXXXX
While we could not identify any provision in your proposed plan that would permit an employee to elect not to take a planned leave of absence, you should be aware that the Regulations require that a DSLP must be established for the main purpose of permitting an employee to fund through salary deferrals, a leave of absence. A provision in a plan which enables an employee to elect not to take a leave of absence may in some circumstances cause the arrangement to not meet this test.
6. Subject to the requirements respecting the annual payment of interest, the arrangement must provide that all amounts held under the plan for an employee will be paid to the employee no later than the end of the first taxation year that commences after the end of the deferral period. (See paragraph 3.2 of ATR-39)
7. The Plan provides for the withdrawal of an employee in consequence of undue financial hardship. It thereafter specifies certain incidents which qualify as financial hardship.
Guidelines may be provided in the Plan as to what might constitute financial hardship. However it is our opinion that financial hardship can only be determined on a case by case basis and only after giving consideration to all of the circumstances of any particular case. Therefore it is our opinion that the comments in your plan should be clearly identified as being guidelines only. (See paragraph 4.2 of ATR-39)
8. With respect to employment benefits, including tuition reimbursement, the plan must provide 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.
9. With respect to the implications of the Plan on Unemployment Insurance ("UI") benefits, you may wish to contact your local Canada Manpower Centre for clarification of the effect that being on this type of leave may have on an employee's eligibility for UI benefits.
In respect to the employee and employers obligation to make contributions under the Canada Pension Plan ("CPP") or UI, we draw your attention to the following comments which expand upon those provided in ATR-39.
Canada Pension Plan
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
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.
10. Please note that this letter is not an advance income tax ruling but is a statement of opinion on the specifics of your proposed plan as submitted and it 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.
Your deposit will be returned under separate cover.
We trust our comments are of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate
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