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 pre-paid leave plan meets conditions of 6801(a).
Position TAKEN:
No - amendments required.
Reasons FOR POSITION TAKEN:
Routine.
XXXXXXXXXX 951823
Attention: XXXXXXXXXX
September 20, 1995
Re: Pre-Paid Leave (4/5) Plan
This is in reply to your letter of July 10, 1995, and further to our telephone conversation (Duff/XXXXXXXXXX) of August 31, 1995. You ask us to approve the draft policy for the above-referenced plan, a copy of which was enclosed with your letter. As confirmed in the telephone conversation, it is not necessary for Revenue Canada to approve your plan before you implement it, but we have reviewed it and have the following comments.
The Income Tax Regulations governing deferred salary leave plans set out a number of conditions which must be met to ensure that taxation of deferred amounts occur in the year of receipt and not in the year of deferral. In order to comply with these conditions, your plan should be amended as follows:
1. The second paragraph of the Preamble should be amended to include a requirement that the "specified future leave of absence" must commence immediately after the four years of deferral.
2.In the "Salary/Benefits" area of the plan a clause should be inserted which states that during the year of the leave of absence the employee will receive no salary or wages from the employer or from a person or partnership that does not deal at arm's length with the employer other than the deferred amounts and the usual fringe benefits.
3.In the first paragraph under "Salary/Benefits" there is a reference to the possibility of payment of accrued interest. Please note that any income earned on the deferred amounts must be paid to the employee in the year earned and must be reported as employment income on the employee's T4 Supplementary.
4.In the first paragraph under "Salary/Benefits" it should be indicated that all deferred amounts and accrued interest must be paid out by December 31 of the year following the deferral period.
5.It will be necessary to amend paragraph 4 of the "Guidelines" so that an employee may withdraw from the plan only in circumstances of financial hardship or similar extenuating circumstances and only with the approval of the employer. Otherwise, the potential exists that the plan could be used for inappropriate tax deferrals instead of for the purpose of funding a leave of absence from employment.
Although the foregoing comments are not binding on the Department, we trust our comments will be of assistance to you. Enclosed for your further information is ATR-39 on the topic of Deferred Salary Leave Plans.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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