5 June 1995 External T.I. 9505815 - DEFERRED SALARY LEAVE PLAN 6801(A)

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:

Amendments required before all of the conditions in section 6801 of the Reguilations would be met.

		950581
XXXXXXXXXX		M.P. Sarazin

Attention: XXXXXXXXXX

June 5, 1995

Dear Sirs:

Re: XXXXXXXXXX
Deferred Salary Leave Plan

This is in reply to your letter of February 9, 1995 in which you requested our comments on whether the proposed XXXXXXXXXX Deferred Salary Leave Plan (the "DSLP") complies with the provisions of paragraph 6801(a) of the Income Tax Regulations (the "Regulations").

A salary deferral arrangement does not have to be approved by the Department for it to comply with the provisions of paragraph 6801(a) of the Regulations. However, a confirmation that your DSLP does meet these provisions can be obtained in the form of an advance income tax ruling if you so desire and a request for it is submitted in the manner set out in Information Circular 70-6R2, a copy of which is enclosed.

Our review of the provisions under the DSLP indicates that there are some deficiencies which should be amended to ensure that the DSLP complies with the Regulations.

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

Section 2 of the DSLP must make reference to a designated educational institution within the meaning of subsection 118.6 of the Income Tax Act (the "Act"). In addition, the minimum leave of absence shall be a period of three 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 or in any other case, six consecutive months.

The last paragraph of section 2 is not correct. Firstly, if the terms and conditions of the DSLP do not meet the requirements of paragraph 6801(a) of the Regulations then the DSLP would not qualify as a "salary deferral arrangement" for purposes of the Act. Secondly, the DSLP must include a term or condition that the employee 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 and 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 similar arrangement.

Section 6 of the DSLP must 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 DSLP was deferred or is to be reduced and reasonable fringe benefits.

While the DPSP refers to the payment of interest on a yearly basis, pursuant to subparagraph 6801(a)(iv) of the Regulations the plan must also provide that any interest or additional amounts 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. Consequently, the amounts paid to the employee would be subject to the usual withholdings and remittances.

The DSLP must provide that, in the event the employee does not take his/her leave of absence in the designated period, the deferred amounts will be paid to the employee in the first taxation year that commences after the end of the deferral period.

It would appear that there is a duplication of the paragraph containing the employee's request to participate in the DSLP which is found in section 4 of the DSLP Application and Approval Request Form. In addition, we would recommend that the paragraph read as follows:

"I have read and understand the terms and conditions of the XXXXXXXXXX Deferred Salary Leave Plan which comply with paragraph 6801(a) of the Income Tax Regulations. I hereby request to defer a portion of my salary under the terms and conditions of such plan in accordance with the option chosen in section 3 above."

Comments

The following comments reflect 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 DSLP.

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 DSLP 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 in the employee's T4 slip.

Although the trustee is deemed under the CPP Act to be an employer, the employee does not enter into a 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 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 DSLP 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 reported 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 Branch
Source Deductions Division
Revenue Canada Taxation
875 Heron Road
Ottawa, Ontario
K1A 0L8

If the DSLP 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 DSLP and it is not binding on the Department. We trust, however, that our comments will be of assistance.

For your information, we enclose the Department's publication ATR-39 which describes a deferred salary leave plan that complies with the requirements of section 6801 of the Regulations.

Yours truly,

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