6 December 1995 External T.I. 9524445 - DSLP & RRSP PENALTY TAX

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:

1)Effect of inability to return to work for period equal to leave of absence under 6801(a) plan;

2)whether there is a deadline to reduce pre-1995 budget RRSP undeducted premiums of up to $8000.

Position TAKEN:

1)No adverse tax consequences where all the deferred amounts have been paid out and employee is unilaterally terminated by employer;

2)no deadline to reduce pre-budget amounts although there is a deadline for 146(8.2) deduction.

Reasons FOR POSITION TAKEN:

Routine

XXXXXXXXXX							952444

Attention: XXXXXXXXXX

December 6, 1995

Dear Sirs:

Re: Self-funded Leave

This is in reply to your letter of July 6, 1995, which has been forwarded to us for reply. We are sorry for the lengthy delay in responding to you. You ask three questions concerning differing tax situations, and the following provides our comments with respect to the first two questions. Your third question was answered under separate cover by the Financial Institutions Section of the Directorate.

1.Self-funded leave

Your query relates to a plan or arrangement as described in paragraph 6801(a) of the Income Tax Regulations (a "deferred salary leave plan"). Subparagraph 6801(a)(v) of the Income Tax Regulations states that a deferred salary leave plan must provide that the employee return to regular employment with the employer after the leave of absence for a period equal to the leave of absence. Where the arrangement contains this provision but it is reasonable to assume or it is known, at the time the arrangement is entered into or at a later date, that either or both parties do not intend to, or cannot, abide by the provision, the arrangement between the employer and the employee will fail to meet the requirements of the Income Tax Act.

For example, at the time an employee knows he or she will not be returning to employment, the deferred amounts and unpaid interest are required to be paid out of the deferred salary leave plan to the employee and are taxable as employment income in the year.

In the situation where the employee has completed the leave of absence and all amounts have been paid out of the deferred salary leave plan to the employee, there will be no adverse tax consequences if employment is unilaterally terminated by the employer before the employee has completed a period of employment equal to the period of the leave of absence; the amounts deferred will not be subject to income tax for years prior to the year in which the period of leave occurred.

2.Excess Contributions to a Registered Retirement Savings Plan

The Part X.1 tax on excess contributions to a registered retirement savings plan (RRSP) is proposed to be amended effective February 27, 1995, by reducing the $8000 cushion in the "cumulative excess amount" to $2000. Nevertheless, a taxpayer who has undeducted RRSP premiums on February 26, 1995, in excess of $2000 will be provided with an additional tolerance of up to $6000 in respect of that excess. Any additional contributions made after February 26, 1995 will be subject to the Part X.1 tax if they are not otherwise offset by RRSP deduction room earned in 1995 or not withdrawn before January 31, 1996. In this respect it should be noted that any RRSP deduction room available for 1996 must first be applied to reduce any pre-budget undeducted RRSP premiums.

For example, assume a taxpayer has $8000 of undeducted RRSP premiums on February 26, 1995, has an RRSP deduction limit of $2500 for 1995, and contributes an additional $2,500 on February 28, 1995. He or she will be subject to tax on $2,500 beginning in 1996 unless that amount is withdrawn before January 31, 1996, or unless there is RRSP deduction room in 1996 which will reduce the over-contributions to $2000. Deduction room arising in 1996 must first be applied to reduce the pre-budget undeducted premiums and will not reduce the amount of the post-budget undeducted premiums subject to tax until the pre-budget undeducted premiums are eliminated.

Deliberate over-contributions to an RRSP will generally be taxed when they are withdrawn, even though they were not deducted in computing income. However, contributions may be withdrawn tax-free in accordance with the subsection 146(8.2) of the Act if, at the time they were contributed, the taxpayer intended to leave them in the RRSP until its maturity.

Although there is no deadline for the reduction of the amount of pre-budget undeducted premiums exempted from the Part X.1 tax by the transitional provision, note that there is a time limit for the deduction under subsection 146(8.2) of the Act. Further information concerning this deduction can be found in the 1994 RRSP and Other Registered Plans Guide which is available at your local tax services office.

We trust our comments will be of assistance to you and advise that our comments concerning the proposed amendment to Part X.1 of the Act reflect our opinion based on the wording as announced by the Department of Finance in July 1995.

Yours truly,

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