24 November 1993 External T.I. 9331185 F - HAA-7680-4-2 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 September 29, 1993, addressed to the Winnipeg Taxation Centre 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"). Your letter was referred to us for reply.

A plan must comply with the requirements of section 6801 of the Regulations in order for it to qualify as a DSLP but there is no requirement for a plan to be approved by the Department before it can be implemented. Nevertheless, if you want confirmation that your Plan complies with 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).

While, this letter does not constitute a ruling, 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 your Plan to comply with the requirements of paragraph 6801(a) of the Regulations.

l.      Article XXXXXXXXXX of the Plan. Definitions: "Individual Agreement". The reference to Schedule "A" should refer to schedule "B"

2.     Article XXXXXXXXXX of the Plan. The reference to 33 1/2 percent must be corrected to read 33 1/3 percent in order to comply with subparagraph 6801(a)(ii) of the Regulations

3.     Article XXXXXXXXXX of the Plan together with clause XXXXXXXXXX of the Individual agreement provides that interest earned on the deferred salary amounts will be paid annually as required by the Regulations. While in itself this provision is acceptable, for clarity, it should be noted that all interest or other additional amounts that accrue to the benefit of an employee to the end of a taxation year must be reported as employment income by the employee in the year it is accrued and must be reported on a T4 supplementary. The amount is also subject to normal withholdings at source.

4.     Article XXXXXXXXXX of the Plan provides that the amount of tax deducted and withheld from payments of salary will be dependent upon your receipt of a ruling from Revenue Canada that the Plan is not unlawful and is acceptable to Revenue Canada. As noted above this letter is not a ruling. Furthermore, please note that Revenue Canada can not provide a ruling that a plan is unlawful. In respect of DSLPs, the Department can only provide rulings on how the Act will apply in respect of a specific plan and in particular whether a plan complies with the conditions of Regulation 6801.

5.     Article XXXXXXXXXX of the Plan provides restrictions on the entitlements of participants while on a leave of absence. To conform with regulation 6801(a)(iii) the Plan must also 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.     Articles XXXXXXXXXX of the Plan provide, among others, that an employee is expected to return to the employ of the Board and that an employee must advise the board of his or her intention to return to duty.

In order to comply with the provisions of subparagraph 6801(a)(v) of the Regulations the Plan must provide that the employee is 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.

7.     Article XXXXXXXXXX of the Plan provides that a leave of absence shall normally follow the deferral period. Subparagraph 6801(a)(1) requires that the leave of absence must commence immediately after a deferral period.

8.     For greater certainty, the Plan might indicate that all 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.

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