18 July 1995 External T.I. 9517475 - XXXXXXXXXX HOSPITAL AND NURSES 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.

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:

DSLP review.

Position TAKEN:

Changes needed.

Reasons FOR POSITION TAKEN:

Routine.

XXXXXXXXXX 951747

Attention: XXXXXXXXXX

July 18, 1995

Dear Sirs:

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

This is in reply to your letter of June 29, 1995, in which you ask us to authorize the above-named Plan, and to advise you of the procedure and costs for requesting an advance income tax ruling.

The authorization of the Department is not required in order to establish the Plan. If the terms of the Plan satisfy the requirements of paragraph 6801(a) of the Income Tax Regulations (the "Regulations"), the Plan will be excepted from the definition of a "salary deferral arrangement" as contained in subsection 248(1) of the Income Tax Act. Consequently, the amounts deferred will not be taxable to the employees until the year they are received out of the Plan.

You may apply for an advance income tax ruling which will set out the tax consequences for the employees who participate in the proposed Plan and will be binding on the Department. Enclosed for your information is Information Circular 70-6R2 and the Special Release thereto which explains the procedure for applying for such a ruling. As explained above, however, such a ruling is not necessary in order to achieve the tax deferral possible under paragraph 6801(a) of the Regulations.

We have reviewed your Plan and note the following changes which should be made to satisfy the requirements of the Regulations.

1.It is required by clause 6801(a)(iv)(A) of the Regulations that all income earned on the deferred amounts be paid in the year to the employee. Paragraphs (e) and (g) of the Plan should be amended accordingly to specify that all income (interest and capital gains) earned on the deferred amounts each year are to be paid to the employee by the end of each year. Such amounts are considered employment income and must be reported on a T4 Supplementary. It follows that (f) on page 3 is inaccurate - the amount must be paid (not just declared) and no exemption is possible.

2.Subparagraph 6801(a)(vi) of the Regulations requires that all amounts held under the arrangement must be paid out to the employee by the end of the first taxation year that commences after the end of the deferral period (the period which ends immediately before the commencement of the leave of absence). This requirement should be added to paragraph (g) of the Plan.

3.Paragraph (i) should be amended to ensure that, notwithstanding any change agreed to, the leave of absence must commence immediately after the deferral period - subparagraph 6801((a)(i) of the Regulations.

4.The purpose of an arrangement must be to fund a leave of absence from employment and not to provide benefits after retirement - subparagraph 6801(a)(i) of the Regulations. An employee should not, therefore, be permitted to withdraw at will from participation in the Plan as provided in paragraph (j). A clause in the Plan permitting withdrawal on the basis of financial hardship or under other similar circumstances would be acceptable, but only if the employer's approval of the withdrawal is also required.

5.Subparagraph 6801(a)(v) requires that the employee return to his regular employment with the employer (or with an employer that participates in the same or a similar deferred salary leave plan) after the leave of absence for a period that is not less than the leave of absence. We note your reference to this requirement in (c) on page 3 and if these items on page 3 form part of the written arrangement, this is satisfactory. But this requirement could also be inserted as a separate paragraph in the Plan or added to paragraph (l).

6.In (d) on page 3, you might also note that in addition to the deferred amount, the employer may pay or provide the usual fringe benefits. Also, the Plan should make it clear that the employee is prohibited from receiving any salary or wages throughout the leave of absence from any person or partnership which does not deal at arm's length with the employer.

We trust the foregoing comments assist.

Yours truly,

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