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 employee may split leave of absence into two periods separated by period of employment.
Position:
No - one leave of absence is to be funded.
Reasons:
Wording of legislation.
953224
XXXXXXXXXX P. Spice
Attention: XXXXXXXXXX
January 17, 1996
Re: Four and One Leave Plan
This is in reply to your letter of October 18, 1995, which has been forwarded to us for reply by the London Tax Services. You ask for an interpretation of the Income Tax Act (the "Act") and Regulations (the "Regulations") as they apply to deferred salary leave plans.
Your request relates to a specific employee and we are unable to provide a binding opinion except in the context of an advance income tax ruling. The following comments, therefore, are general in nature.
Arrangements to defer receipt of part of an employee's income and fund a leave of absence pursuant to a written agreement entered into after July 27, 1986, must comply with paragraph 6801(a) of the Regulations. Some of the conditions that must be satisfied are the following:
1. The period of deferral may not exceed six years. If the deferred salary leave plan permits either or both the deferrals and the commencement of the leave of absence to be postponed, such a postponement may not result in the deferral period extending beyond the six years.
2. An employee may not withdraw from a deferred salary leave plan at will. The plan terms should permit withdrawals only in extenuating circumstances and only with the permission of the employer.
3. All income or interest earned on the deferred amounts must be paid to the employee in the calendar year earned, and constitutes employment income which is to be reported on a T4 slip.
4. All deferred amounts must be paid to the employee no later than the end of the first taxation year that begins after the end of the deferral period. For example, if the deferral occurs over five school years and ends June 30 of the fifth school year, the deferred amounts must be paid out by December 31 of the next year.
5. The leave of absence must last a minimum of 6 consecutive months. Alternatively, the leave of absence may last only 3 consecutive months if the purpose of the leave is to attend full-time at a designated educational institution (within the meaning assigned by subsection 118.6(1) of the Act). A leave of absence for one school semester from February through June will not satisfy the requirements of the Regulations unless the teacher is in full-time attendance at the designated educational institution as noted above. If, however, the teacher is employed in July and August but is not required to report to work, these two months may be counted towards the 6 month minimum leave requirement.
6. If the intent of the plan is to pay part of the deferred amounts before the leave of absence (i.e., while the teacher is working and receiving full or reduced salary) and to pay part of the deferred amounts during the leave of absence, the plan will not satisfy the requirements of the Regulations. The Regulations require that the main purpose is to fund the leave of absence, not to provide supplemental funding in a period of regular employment. Furthermore, a plan which separates the periods of leave by a period of employment, even if each leave period meets the minimum consecutive months requirement, will not satisfy the Regulations. The Regulations refer to "a leave of absence". A subsequent leave of absence would have to be funded by a subsequent deferral period pursuant to a new written agreement between the employee and employer.
7. If the employee does not intend to return to employment with the employer after the leave of absence for a period of time equal to the period of leave, the plan fails to meet the requirements of the Regulations.
Although the foregoing comments are not binding on the Department, we trust they are helpful. Enclosed for your further information is ATR-39 on the topic of deferred salary leave plans. We are providing a copy of this letter to the London Tax Services and if you have questions with respect to a specific employee we suggest that they be addressed to that office.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
c.c. Marion McMillan
London Tax Services
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