30 November 1995 Ruling 9636773 - DSLP

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: Routine 6801 plan

Position:		Routine

Reasons:		Routine

XXXXXXXXXX 3-963677

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX
Deferred Salary Leave Plan ("DSLP")

This is in reply to your letter of XXXXXXXXXX, and our telephone conversation of XXXXXXXXXX in which you requested an advance income tax ruling in respect of your proposed Deferred Salary Leave Plan (the "Plan").

Facts

XXXXXXXXXX (the "Employer") files returns at the XXXXXXXXXX Taxation Centre.

The Employer uses the following payroll deduction accounts:

XXXXXXXXXX

Proposed Transaction

The Employer proposes to implement the Plan detailed in your submission as modified in accordance with our above-noted conversation. The significant details of the Plan which are relevant to this ruling request are as follow:

The Employer will not assume responsibility for any consequences arising out of the Plan relative to effects on pensions, income tax arrangements, unemployment insurance, Canada Pension Plan, or any liabilities incurred by a staff member as a result of participation in the Plan.

The Plan is not established to provide retirement benefits.

The Plan is set up to allow employees participating in the Plan ("Participants") to fund a leave of absence of not less than six (6) consecutive months and not more than twelve (12) consecutive months, through deferral of salary for the purposes of financing the leave of absence.

The leave of absence must commence immediately after the deferral period but not later than six years after the deferral of salary begins.

The annual deferral cannot exceed 33 and 1/3% of the Participant's expected annual salary.

Amounts deferred are held in trust and income earned by the trust will be paid to and taxed annually in the hands of the Participant. All income earned in a year will be paid in that year. Amounts paid will be reported as employment income and be included on the Participants T4s as such.

During the leave of absence, Participants are not entitled to receive any salaries or wages from the employer or from a person or partnership with whom the employer does not deal at arm's length, except the amount deferred under the Plan plus any accrued interest and such reasonable fringe benefits that the employer usually pays to or on behalf of employees. In keeping with the Income Tax Regulations, once the leave of absence has commenced, the Participant must stay off for the chosen period.

The Plan provides an obligation of the part of the Participant to return to work for a period, after the leave of absence, which is not less than the period of the leave of absence.

Participants shall defer a portion of their gross salary into the Plan on a regular bi-weekly basis. The maximum period of time that salary can be deferred is five years; the minimum is one year. If the desired leave of absence is in excess of six months, the minimum deferral period is two years. This will allow Participants to take a minimum six month leave of absence after one year of salary deferral and from six months up to a one year leave of absence after two to five years of deferral.

The following shall constitute the deferral terms available:

a)deferral of a portion of annual salary for a period of no less than one year followed by a six month leave of absence;

b)two years deferral of one third annual salary in each year followed by a one year leave of absence;

c)three years deferral of one quarter annual salary in each year followed by a one year leave of absence;

d)four years deferral of one fifth annual salary in each year followed by a one year leave of absence; and

e)five years deferral of one sixth annual salary in each year followed by a one year leave of absence.

The payment of salary and benefits during the deferral period and the leave of absence shall be as follows:

1)During the deferral period, the Participant will be paid a reduced percentage, in accordance with the terms chosen by the Participant.

2) Benefit Structuring

During the deferral period and during the leave of absence, any benefits related to the salary level shall be structured according to the salary the participant would have received during the deferral period had the Participant not been in the Plan. ie. contributions to the benefits package continue based on 100% of normal salary.

3) Premium Cost

A Participant's coverage for all health, medical, pension and long term disability plans that are in effect immediately prior to the leave of absence, will, if eligibility conditions permit, be maintained during the leave of absence. However, all premium costs of such plans shall be paid by the participant during the leave.

4) Statutory Deductions

During the deferral period, Canada Pension Plan contributions and Income Tax deductions are based upon the salary actually received by the Participant. During the leave of absence, C.P.P. and Income Tax are based on the amount of deferred salary paid to the Participant. The employer will maintain its share of C.P.P. contributions during both the deferral period and leave of absence.

Unemployment Insurance premiums are based upon the Participant's full salary during the deferral period. This ensures that if a Participant is laid off or terminated during the deferral period, their entitlement to U.I. benefits will be calculated based on their full salary. During the leave of absence, there are no deductions for U.I. premiums because the leave of absence is not considered to be insurable employment. As a result, Participants laid off or terminated after returning from the leave of absence must work for a minimum of 20 weeks of insurable employment to be eligible for U.I. benefits. This may also have implications Lor a parental leave commencing within 20 weeks of return from a leave of absence.

It is the responsibility of the Participant to investigate any such implications on individual circumstances.

5)Vacation, Holidays, Seniority, Sick Leave, and Salary Progression

During the leave of absence the Participant shall not continue to accumulate paid vacations, holidays, seniority, sick leave, and salary progression. However, during the years preceding and following the leave of absence, the Participant will receive full vacation, holidays, sick leave, benefits, seniority and salary progression.

6) Assignment on Return

On return from a leave of absence, a participant will be assigned to the same position or one at the same level of pay in the event of an agency reorganization. An employee hired to replace a participant shall be considered to be a temporary employee.

7) All deferred amounts must be paid to the Participant no later than one year after the leave of absence commences.

8) The Employer will not provide matching contributions to the Participant's R.R.S.P. through the Mutual Life contribution plan during the leave of absence.

9) Participants in the Plan may not withdraw from the Plan in circumstances other than extreme financial hardship or other extenuating circumstances, termination of employment, including layoff, total and permanent disability of the Participant and death of the Participant.

10) Temporary suspension of salary deferrals may be requested for the following reasons: parental leave; disability; short term sickness leave over 30 days; unpaid leave of absence over 30 days.

11) The leave of absence is to be taken at the conclusion of the salary deferral period. However, subject to operational requirements, and approval by the Program Director, the leave of absence may be postponed at the Participant or Employer's request for up to a maximum of two years. Under no circumstances can the deferral period including any extensions exceed 6 years from the date deferrals commenced.

12) Any Participant who resigns or is terminated prior to commencement of the leave of absence, shall cease to be a participant in the Plan and shall receive a lump sum payment of monies deferred less statutory withholding deductions.

Purpose of the Proposed Transaction

The Plan is to afford eligible employees the opportunity of taking a leave of absence without pay and financing the leave of absence through the deferral of salary. It will allow Participants to plan and self finance a continuous leave of absence for a minimum period of 6 months up to a maximum of 12 months.

Additional Information

To the best of your knowledge, none of the issues involved in this ruling are being considered by a Tax Services Office or Taxation Centre in connection with a return already filed and none are under objection.

Rulings

Provided that the terms and conditions of the Plan are accurate, the above information constitutes complete disclosure of the relevant facts, and the Plan is implemented as proposed, we rule that:

A.the Plan will satisfy the requirements set out in paragraph 6801(a) of the Income Tax Regulations and will therefore be excluded from the definition of a "salary deferral arrangement" as that term is defined in subsection 248(1) of the Act.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 dated September 8, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, and is binding provided the Plan is implemented by XXXXXXXXXX.

Yours truly,

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