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 complies with Reg. 6801(a)
Position TAKEN:
Two amendments to plan required.
Reasons FOR POSITION TAKEN:
Routine
XXXXXXXXXX 941602
Attention: XXXXXXXXXX
July 18, 1994
Dear Sirs:
Re: Deferred Salary Leave Plan (the "Plan")
This is in reply to your facsimile transmission of May 18, 1994, which was forwarded to us by the Kitchener District Office. You ask for our permission to enter into an agreement under the above-noted Plan with respect to one employee (XXXXXXXXXX).
It is not necessary to obtain permission from the Department to initiate an arrangement under a deferred salary leave plan. So long as the terms of your Plan meet the requirements of the Income Tax Act and Regulations, the employee will not be taxed on the amounts deferred in the year, and in the year of the leave of absence the deferred amounts paid to the employee will be taxed as employment income. The interest income which accrues on the deferred amounts must be paid out each year and taxed as employment income, as provided for in your Plan at XXXXXXXXXX.
We have reviewed the terms of your Plan and note two provisions which should be amended in order to comply with the Income Tax Regulations.
A deferred salary leave plan must be established to permit the employee to fund a leave of absence and not to fund retirement benefits. The plan must prohibit the employee from withdrawing at will; otherwise, the plan might be utilized as an income-sheltering device where funds can be deposited free of tax and then withdrawn at any time and for any purpose. A plan may provide for termination of participation on death, or, as in your Plan, termination of employment. Withdrawal for any other reason should only be under extenuating circumstances such as financial hardship, and then only with the permission of the employer. Accordingly, your provision dealing with "Withdrawal Rights" (XXXXXXXXXX) should be amended.
The Income Tax Regulations also require that during the year of the leave of absence the employee may not receive any salary or wages from the employer or from any person or partnership with whom the employer does not deal at arm's length. The provision entitled "Employment" at XXXXXXXXXX of your Plan should be amended to reflect this requirement.
We trust these comments are helpful, although they are not binding on the Department since they are not provided in the context of an advance ruling.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
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