11 August 1995 Internal T.I. 9520006 - PRE86 VOLUNTARY 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:

Would a specific voluntary leave plan be grandfathered from the salary deferral arrangement provisions of the Act?

Position TAKEN:

Question of fact to be determined on a case by case basis.

Reasons FOR POSITION TAKEN:

Certain conditions have to be in order to be grandfathered, consequently, each case has to be looked at.

	                                       	August 11, 1995

	HEADQUARTERS	HEADQUARTERS
	Source Deductions Division	              M.P. Sarazin
	Barbara Larocque	                        (613) 957-8953
	DO/TC Support Services Officer
		                                        952000

Pre-1986 Voluntary Leave Plan

This is in reply to your memo of July 27, 1995 requesting our comments regarding the taxation of funds extracted from a pre-February 26, 1986 voluntary leave plan (the "Plan").

Effective February 26, 1986, deferred amounts paid into a salary deferral arrangement as defined in the Income Tax Act (the "Act"), must be reported as income in the year of deferral except where they are paid into a plan under an agreement made prior to that date. Whether an agreement under a particular pre-February 26, 1986 voluntary leave plan would be grandfathered (excluded) from the "salary deferral arrangement" provisions of the Act is a question of fact which can only be determined subsequent to a review of the provisions of the particular agreement. In order to be grandfathered, the terms of the arrangement must ensure that:

the employer is legally obligated to defer payment of amounts to the employee pursuant to an agreement in writing made with his employee or former employee before February 26, 1986; and

the employee cannot, at any time after April 1986, cancel or otherwise avoid that obligation.

Even though the draft provisions of the XXXXXXXXXX plan which was attached to your memo appear to have satisfied the above noted conditions, the terms of each written agreement between the particular employee and the employer would have to be reviewed, on a case by case basis, in order to ensure that the conditions were, in fact, satisfied and that the particular agreement was grandfathered.

If grandfathered, this plan would be considered an employee benefit plan ("EBP"). Where benefits become payable under the Plan on termination of employment or retirement and the payout election is made prior to the Plan member's termination of employment or retirement, the Department normally accepts as a method of payout out of an EBP:

1)the payment of a lump sum within 365 days of the termination of employment,

2)the payment of equal instalments, either annually, semi-annually or monthly, over a period not to exceed 15 years, or

3)the purchase of a fixed term annuity not exceeding 15 years or a life annuity with or without a term certain not exceeding 15 years, on behalf of the terminating employee but held by the employer as owner and beneficiary.

In any case, any amount received by a plan member from a grandfathered EBP would be included in the plan member's income pursuant to paragraph 6(1)(g) of the Act. The determination of when a plan member would have a right to receive an amount under an EBP would be dependant upon the terms of the particular plan. Where the third method of payout is chosen, no amounts would be included in the plan member's income by virtue of the purchase of an annuity by the plan but rather would be included in income in the year an amount is received.

A written voluntary leave plan that was established between an employer and an employee before July 28, 1986 may also be excluded from the "salary deferral arrangement" provisions of the Act pursuant to paragraph 6801(b) of the Income Tax Regulations (the "Regulations") where it is reasonable to conclude, having regard to all the circumstances, that the arrangement is not established to provide benefits on or after retirement but is established for the main purpose of permitting the employee to fund a leave of absence from the employment. It would appear that the XXXXXXXXXX plan is established to provide benefits on or after retirement and, consequently, the plan would not be grandfathered under paragraph 6801(b) of the Regulations.

We have enclosed a copy of a letter issued by the Rulings Directorate dated December 18, 1985 which contained comments regarding the XXXXXXXXXX voluntary leave plan. Please refer to Interpretation Bulletin IT-502 for more information concerning EBPs.

We trust the above comments will be of assistance to you.

Yours truly,

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