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.
Is plan acceptable under 6801
July 19, 1996
Re: Pre-Paid Leave Policy
This is in reply to your letter of May 17, 1996, referred to us for reply on July 8, 1996, in which you ask if your revised pre-paid leave policy (the "Plan") will continue to meet the provisions of section 6801 of the Income Tax Regulations (the "Regulations").
In your letter you indicate that the Plan has been revised but you have not indicated what changes have been made to it. On the other hand, the Human Resources Policy Statement provided indicates that the arrangement, as written, is effective XXXXXXXXXX. Accordingly, in order to reply, we have assumed the provisions, as provided, have been used in granting pre-paid leave since that date.
If our assumption is correct, we must first note that the Plan has never been in compliance with the provisions of section 6801 of the Regulations and unintended tax consequences could be applicable to any employees who have participated or are presently participating in the Plan. We have therefore requested Mr. G. Troy, the Director of the Toronto North Tax Services Office to assist you in determining the most appropriate basis for correcting any problems. Mr. Troy may be contacted by telephone at 512-4000.
The problems with the Plan that we have identified are as follows:
XXXXXXXXXX are in error with respect to the payment of interest. Subparagraph 6801(a)(iv) of the Regulations requires a deferred salary leave plan ("DSLP") to provide that any amounts in respect of interest or other additional amounts that may reasonably be considered to have accrued to or for the benefit of an employee to the end of a calendar year must be paid in the year to the employee.
XXXXXXXXXX of the Plan is insufficient. The Regulations require that a DSLP must be established for the main purpose of permitting an employee to fund through salary deferrals a leave of absence. A provision which enables an employee to elect not to take a leave of absence may in some circumstances cause the arrangement to not meet this test. Accordingly, the Plan should not permit an employee to withdraw from a deferred salary leave plan at will. It may, however, permit withdrawals in extenuating circumstances but only with the permission of the employer.
XXXXXXXXXX of the Plan provides for an indefinite postponement of a period of leave while the Agreement provides that "the leave period must commence no later than 6 years after (the) Salary Deferral Commencement date with a duration of at least 6 months as stated in the Income Tax Act".
First, paragraph 6801(a) of the Regulations requires a DSLP to stipulate that a period of deferral may not exceed six years from the date on which deferrals commence and that the leave of absence must begin immediately after the deferral period.
Second, the Act does not require a leave period to be of at least six months duration in all cases. The Regulations also permit a leave of absence of not less than three consecutive months where the leave is to be taken for the purpose of permitting full-time attendance of the employee at a designated educational institution.
XXXXXXXXXX of the Plan provides that the employee will be reinstated upon the employee's return from a leave of absence. The Plan must provide that the employee is to return to regular employment with the employer or an employer that participates in the same or a similar arrangement after the leave of absence for a period that is not less than the period of the leave of absence.
XXXXXXXXXX of the Agreement should restrict the deferral to a maximum of 20% as indicated in XXXXXXXXXX of the Plan or 33 and 1/3% as provided by the Regulations.
Subject to item 1 above, in accordance with Regulation 6801(a)(v), the Plan must provide that all deferred amounts will be paid to the employee no later than the end of the first taxation year that begins after the end of the deferral period.
In accordance with Regulation 6801(a)(iii), the Plan must provide that during the leave period, the employee cannot receive any salary or wages from the employer or any other person or partnership with whom the employer does not deal at arm's length, other than the deferred amounts and reasonable fringe benefits.
As noted above, since it appears your Plan already exists, specific discussions on its application to employees must be made through your local Tax Services Office. Accordingly, our comments are not binding on the Department and are general in nature. However, we have provided a copy of this letter to the Toronto North Tax Services Office for its consideration.
We also understand that you have been provided with a copy of the Department's published Advance Income Tax Ruling ATR-39 on the topic of deferred salary leave plans. This includes the information regarding UIC, CPP and income tax deductions you requested in your letter. However, if you have any further questions in respect of these topics they may also be addressed to the Toronto North office.
Financial Industries Division
Income Tax Rulings and
Policy and Legislation Branch
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