13 June 1994 External T.I. 9411745 - 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.

Principal Issues:

Whether deferred salary leave plan meets the requirements of paragraph 6801(a) of the Regulations.

Position TAKEN:

Yes.

Reasons FOR POSITION TAKEN:

Routine (See 5-932507, W. C. Harding which is dealing with an identical plan).

								5-941174
XXXXXXXXXX								L.Roy

Attention: XXXXXXXXXX

June 13, 1994

Dear Sir\Madam:

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

This is in reply to your letter of April 28, 1994, concerning the above-mentionned proposed plan, in which you requested the Department's approval as a deferred salary leave plan ("DSLP").

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. However, a confirmation that your Plan meets the provisions of section 6801 of the Regulations can be obtained in the form of an advance ruling request if you so desire and a request is submitted in the manner set out in Information Circular 70-6R2, a copy of which is enclosed.

This letter is not an advance income tax ruling but is a statement of opinion on the specifics of your proposed Plan and as such is not binding on the Department. We have, however, reviewed the terms of your Plan and we can advise that in our opinion it does, in fact, meet the conditions of section 6801 of the Regulations.

While we can advise that the plan meets the Regulations, we must also note that the Plan's provisions for the payment of interest may lead to some misunderstandings. The Regulations require that all interest earned in a DSLP in a taxation year must be paid out of the plan to the participants annually. This is a mandatory provision and it can not be subject to an election by the Plan participants. Further, it should be noted that these amounts must be treated as employment income for the purposes of the Income Tax Act and when paid must be reported on the participant's T4 supplementary with the usual tax withholdings and remittances being made.

To clarify, the following comments with respect to Canada Pension Plan and Unemployment insurance may be of assistance.

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 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 14 for that particular year. If such is the case, the amount of contributory earnings must be recorded in box 26 of the T4 which should in turn coincide with the amount of contributions reported in box 16. 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 28 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.

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

Yours truly,

for Director
Financial Industries Division
Rulings Directorate