18 October 1993 External T.I. 9326565 F - HAA7680-4-2 DSLP

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:  XXXXXXXXXX Deferred Salary Leave Plan (the "Plan")

This is in reply to your letter of July 23,1993, in which you asked us to confirm that the above-noted Plan complies with the provisions of paragraph 6801(a) of the Income Tax Regulations (the "Regulations") as a deferred salary leave plan (a "DSLP").

As discussed during our telephone conversation of October 13, 1993, (XXXXXXXXXX - Harding) a plan must comply with the requirements of section 6801 of the Regulations in order for it to qualify as a DSLP. However, there is no requirement for a plan to be approved by the Department before it can be implemented. Nevertheless, should you wish confirmation that your plan meets the provisions of the Regulation, it can be provided if it is requested in the form of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R2 (enclosed).

As further discussed during our telephone conversation, we have reviewed the terms of your Plan and we can advise that in our opinion the following changes should be made in order for it to fully comply with the requirements of paragraph 6801(a) of the Regulations.

l. The Plan should indicate that it is not established to provide benefits to the employees on or after retirement.

2.     XXXXXXXXXX of the Plan provides that accrued interest earned will be paid out to the employees on or before December 31st of each year while XXXXXXXXXX defines accrued interest as being, in part, the interest accrued from the last date to which interest has been paid in accordance with XXXXXXXXXX Read together, these two provisions could defer the payment of interest from one calendar year to the next and this would be contrary to the provisions of Regulation subparagraph 6801(1)(a)(iv) As suggested, this shortfall in the Plan may be corrected by changing part (b) of the definition to January 1 of each year.

3.     For greater certainty, the Plan might indicate that any amounts paid under the Plan must be treated as employment income for purposes of the Income Tax Act, the Canada Pension Plan (CPP) and the Unemployment Insurance (UIC). In consequence, the amounts, when paid, must be included on the employee's T4 supplementary and the usual tax withholdings and remittances must be made by the employer.

To clarify, the following comments may be of assistance.

Canada Pension Plan ("CPP")

It is the Department's position that Canada Pension Plan ("CPP") premiums are 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 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.

4.     XXXXXXXXXX of the Plan also provides that interest will be paid on or before December 31 of each year so long as the agreement is considered by Revenue Canada to be a DSLP. It is our opinion that the requirement to pay the interest annually must be a binding provision of the plan which can not be subject to our approval or continued approval of the Plan.

5.     XXXXXXXXXX provides restrictions on the entitlements of participants while on a leave of absence. As written it provides that a participant can not accumulate nor be entitled to any remuneration from the employer. To conform with regulation 6801(a)(iii) the plan must provide that throughout the leave of absence, the employee can not receive any salary or wages from the employer, or from any other person or partnership with whom the employer does not deal at arms length, other than payments to be made under the Plan and any reasonable fringe benefits that the employer usually pays to or on behalf of its employees.

6.     XXXXXXXXXX provides that no amendment can be made to the Plan to prejudice any tax ruling which is applicable to the Plan. As discussed, this letter is not an advance income tax ruling.

In our view an advance income tax ruling should not be necessary if the Plan is amended as discussed above. However, should you desire one, we will be pleased to again review your Plan upon its amendment and issue a ruling thereon provided your request is made pursuant to the procedures outlined in Information Circular 70-6R2.

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

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate