26 January 1996 External T.I. 9528085 - 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:

	Does the plan meet the requirements of section 6801 of 	the Regulations?

Position:

No

Reasons:

	Certain amendments are required before all the 	conditions of section 6801 of the Regulations are met

		5-952808
XXXXXXXXXX			Franklyn S. Gillman

Attention: XXXXXXXXXX

January 26, 1996

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 Deferred Salary Leave Plan that was entered into between XXXXXXXXXX and a member of its staff (the "Plan") to determine whether it complies with the provisions of paragraph 6801(a) of the Income Tax Regulations (the "Regulations").

The situation described in your letter is an actual fact situation relating to a transaction that has occurred already. Accordingly, the review of such transactions falls within the responsibility of the Tax Services Office and it is the practice of the Rulings Directorate not to comment on such transactions. Assurances as to the tax consequences of proposed transactions can be given in response to a formal request for an advance income tax ruling which would involve, amongst other things, a full analysis of the proposed transactions including a thorough review of the relevant agreements pertaining to the proposed transaction. However, 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 Regulations.

While we have not reviewed the agreement entered into by you and the member of your staff, we have reviewed the provisions of your Plan in general and are prepared to offer the following comments regarding some deficiencies which should be amended to ensure that the Plan complies with the Regulations.

The Plan should clearly indicate that it is not established to provide benefits to the participants on or after retirement.

The Plan provides that an employee may withdraw from the Plan "at any time" during the deferred period provided three (3) months notice is given. A voluntary withdrawal provision of this nature may indicate that the main purpose of the Plan is not to permit an employee to fund a leave of absence but rather to defer income taxes. Accordingly, the third paragraph of the Plan should be amended to provide an employee with the right to withdraw from the Plan only in the case of financial or other hardship.

The Plan must provide that, throughout the leave of absence period, an 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.

Pursuant to subparagraph 6801(a)(iv) of the Regulations, the Plan must provide that any interest or additional amounts (capital gains) that may reasonably be considered to have accrued for the benefit of an employee in a year must be paid in that year to the employee. These amounts are to be treated as employment income for the purpose of the Income Tax Act (the "Act"). In consequence, the amounts, when received, must be included on the employee's T4 Supplementary and the usual withholdings tax and remittances must be made. The appropriate amendments should be made.

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 deferral period.

The Plan, as required, provides, at paragraph (m) of page 25, that an employee must return to his/her regular employment after the leave of absence. However, it must also provide that the employee must return for a period that is not less than the period of the leave of absence. The Plan may, if it is so desired, also provide for an employee to return to the employ of another employer which participates in the same or a similar arrangement.

The Plan must provide that, in the event the employee does not take a leave of absence in the designated period, the deferred amounts will be paid to the employee in the first taxation year that commences after the end of the deferral period. A deferral period may be extended (as provided for in a plan or requested during the deferral period) provided that it does not exceed six (6) years.

Pursuant to subparagraph 6801(a)(iv) of the Regulation, the Plan must provide that the amounts deferred in respect of the employee under the arrangement are held by or for the account of any person or by a trust governed by a plan or an arrangement that is an employee benefit plan as that term is defined at subsection 248(1) of the Act.

Comments

The following comments reflects 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 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 on the employee's T4 slip.

Although the trustee is deemed under the CPP Act to be an employer, the employee does not enter into new employment with the trustee when he goes on leave. Consequently, while CPP contributions that are required to be paid during the leave period are to be deducted and remitted by the trustee as by any other employer, CPP contributions paid in the year prior to the leave period must be taken into consideration by the trustee. For example, if the required CPP contributions for a year by an employee were $700 and the employee contributed $500 before going on leave, the trustee would be required to deduct and remit CPP contributions for that year of $200 on behalf of the employee, plus the employer's portion.

The trustee will be required to prepare T4s reflecting the amount paid by the trustee to the employees under the Plans and, among other things, the CPP contributions. However, since CPP contributions made during the year prior to the leave period are to be taken into consideration by the trustee, the amount of contributory earnings reported by the trustee may not coincide with the earnings reported in box "C" for that particular year. If such is the case, the amount of contributory earnings must be recorded in box "I" of the T4 which should in turn coincide with the amount of contributions reported in box "D". There may also be instances where the trustee will not have made any deductions for CPP because the employee reached the maximum contributions prior to the leave period. If such is the case, a check mark should be indicated in box "J" of the T4 under CPP.

If further information is required concerning the trustee'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 Section
Source Deductions Division
Revenue Canada
875 Heron Road
Ottawa, Ontario
K1A 0L8

If the 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 the Plan and it is not binding on the Department.

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.

We trust, however, that our comments will be of assistance.

Yours truly,

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

encl.