10 April 1995 External T.I. 9502595 - 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 plan meets the requirements of section 6801 of the Regulations

Position TAKEN:

No

Reasons FOR POSITION TAKEN:

Plan needs to be amended to meet all the requirements of section 6801 of the Regulations.

	 	5-950259
XXXXXXXXXX	M. Shea-DesRosiers

Attention: XXXXXXXXXX

April 10, 1995

Dear Sirs:

Re: XXXXXXXXXX
Deferred Salary Leave Plan(the "Plan")
Section 6801 of the Income Tax Regulations (the "Regulations")

This is in reply to your letter of December 14, 1994, with an enclosed copy of your proposed Plan which was addressed to the Registered Plan Division with a request that your Plan be registered and is also further to our telephone conversations (XXXXXXXXXX/Shea-DesRosiers) of April 3 and 5, 1995. We apologize for the delay in replying to your letter.

There are no provisions in the Income Tax Act or the Regulations requiring that the Plan be registered. All that is required is that the Plan meet the requirements of paragraph 6801(a) of the Regulations.

Our review of the Plan indicates that there are a number of deficiencies which should be amended to ensure that the Plan complies with the Regulations. These include:

1. The Plan should clearly indicate that it is not established to provide benefits to the participants on or after retirement.

2. The Plan provides that the employee may withdraw from the Plan "at any time" during the deferred period provided three (3) months notice is given. A voluntary withdrawal provision of this nature may indicate that the main purpose of the Plan is not to permit the employee to fund a leave of absence but rather to defer income taxes. Paragraph XXXXXXXXXX of the Plan should be amended to provide an employee with the right to withdraw from the Plan only in the case of financial or other hardship.

3. The Plan must specify that the minimum leave of absence shall be for a period of three (3) consecutive months if the leave of absence is for the purpose of permitting the full-time attendance of the employee at a designated educational institution within the meaning of subsection 118.6 of the Income Tax Act. In any other case, the leave of absence must be for a period of not less than six (6) consecutive months.

4. Subparagraph 6801 (a)(i) of the Regulations provides that a leave of absence must commence immediately after the deferral period and that the deferral period must not exceed 6 years from the date on which the deferrals are commenced. In our view, the Plan should clearly provide that, under no circumstances will a deferral period in excess of 6 years be allowed. Accordingly, paragraph XXXXXXXXXX should be amended to indicate that the year of deferral must commence immediately after the deferral period. Should any postponement cause the leave of absence to commence at a later time, the provisions of subparagraph 6801(a)(vi) of the Regulations will have application and all amounts held under the arrangement will have to be paid to the employee no later that the end of the first taxation year that commences after the end of the six (6) year deferral.

5. Paragraph XXXXXXXXXX of the Plan should be amended to provide that, throughout the period of leave of absence, the employee does not receive any salary or wages from the employer or from a person with whom the employer does not deal at arm's length other than the amount by which the employee's salary under the Plan was deferred or is to be reduced and reasonable fringe benefits. The underlined words should be added .

6. The Plan, as required, provides, at paragraph XXXXXXXXXX that an employee must return to his/her regular employment after the leave of absence for a period that is not less than the period of the leave of absence. The Plan may, if it is so desired, also provide for an employee to return to the employ of another employer which participates in the same or a similar arrangement.

7. Pursuant to subparagraph 6801(a)(iv) of the Regulations, the Plan must provide that any interest or additional amounts (capital gains) that may reasonably be considered to have accrued for the benefit of the employee in a year must be paid in that year to the employee. These amounts are to be treated as employment income for the purpose of the Income Tax Act. In consequence, the amounts, when received, must be included on the employee's T4 Supplementary and the usual tax withholdings and remittances must be made. Paragraph XXXXXXXXXX should be amended accordingly. Revenue Canada does not give any exemption as to the treatment of interest in the Plan.

8. The Plan provides at XXXXXXXXXX that amounts will be paid out within 3 months in the event of withdrawal. To comply with subparagraph 6801(a)(vi) of the Regulations, the Plan must also provide that notwithstanding these provisions or any other provision, all amounts will be paid out of the Plan no later than the end of the first taxation year that commences after the end of the deferral period.

9. Subparagraph 6801(a)(ii) of the Regulations requires that the percentage deferred in any taxation year of the employee shall not exceed 331/3% of the amount of salary that the employee would normally receive in that year. A taxation year for an individual is usually the calendar year. The Plan should indicate that in no event can the deferred salary exceed such maximum in any one calendar year.

10. This is to confirm that in our telephone conversations referred to above you stated that paragraph XXXXXXXXXX of the Plan means that, for instance taking no. 1 as an example, that the deferral is for 6 years and the 7th year is the year of leave. The same applies to the other options, there is no deferral during the year of leave. The Plan should be amended to clarify this aspect.

Comments

The following comments reflects the Department's position concerning unemployment insurance premiums and Canada Pension Plan contributions. You may wish to include some or all of the following comments in the Plan.

Unemployment Insurance

Unemployment insurance premiums are to be based on the employee's gross salary during the deferral period and no premiums are to be withheld from the deferred amounts when paid to the employee during the leave period.

Canada Pension Plan("CPP")

CPP contributions 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 Plans 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)952-8179 or to the following address:

Coverage Policy and Legislation Section
Source Deductions Division
Revenue Canada Taxation
875 Heron Road
Ottawa, Ontario
K1A 0L8

If the Plan is amended as discussed above, it is our opinion that it will meet the requirements of paragraph 6801(a) of the Regulations. You are advised that this letter is not an advance income tax ruling but is merely a statement of opinion on the specifics of your proposed Plan and it is not binding on the Department.

We include for your information a copy of ATR-39 as a model of a Plan that meets the requirements of section 6801 of the Regulations.

This letter is not an advance income tax ruling but is a statement of opinion on the specifics of the Plan and it is not binding on the Department. We trust, however, that our comments will be of assistance.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch