5 December 1995 External T.I. 9519245 - 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 a plan meets the requirements under the ITA to be a deferred salary leave plan.

Position:

Provided regulation 6801 of the Regulations are followed to qualify it as a prescribed plan it would qualify.

Reasons:

The Regulations are adhered to.

	 	5-951924
XXXXXXXXXX		Franklyn S. Gillman

Attention: XXXXXXXXXX

December 5, 1995

Dear Sirs:

Re: Deferred Salary Leave Plan

This is in reply to your letter dated July 13, 1995 wherein you requested that we review the proposed XXXXXXXXXX Deferred Salary Leave Plan (the "Plan") for possible acceptance for implementation.

A deferred salary leave plan does not have to be approved by Revenue Canada (the "Department") for it to comply with the provisions of paragraph 6801(a) of the Income Tax Regulations (the "Regulations"). However, a confirmation that your Plan 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 Plan indicates that there are some deficiencies which should be amended to ensure that the Plan complies with the Regulations.

The Plan should specify that the reference it makes to a designated educational institution is within the meaning of subsection 118.6 of the Income Tax Act (the "Act").

The Plan mentions that Revenue Canada regulates all deferred salary leave programs and has the ability to cancel any employer plan if the regulations are violated. This statement is not accurate. As stated above, a deferred salary leave plan does not have to be approved by the Department for it to comply with the provisions of paragraph 6801(a) of the Regulations. All that is needed is that the Plan comply with the provisions of paragraph 6801(a) of the Regulations. Should it not comply, any deferred salary in respect of any of the participants would generally be treated as income in the year earned.

The Plan includes 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. The Plan should however be corrected in that this requirement is not imposed by Revenue Canada, but by the Act. In addition, the Act also provides that an employee may return to the employ of another employer which participates in the same or similar arrangement. This condition may be included in the Plan.

The Plan 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 Plan was deferred or is to be reduced and reasonable fringe benefits.

Although the Plan refers to the payment of interest on a yearly basis, which is pursuant to subparagraph 6801(a)(iv) of the Regulations, the Plan must also provide that any interest or earnings that are 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 Plan should clearly show that the provisions of subparagraph 6801(a)(vi) of the Regulations would have application where any postponement causes the leave of absence to commence at a later time. If this should happen, all amounts held under the arrangement would have to be paid to the employee no later than the end of the first taxation year that commences after the end of the six (6) year deferral.

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 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 deferred profit sharing 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 in the employee's T4 slip.

If further information is required concerning the employer'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 deferred salary leave 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 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 Directorate
Policy and Legislation Branch

Enclosures