25 March 1997 External T.I. 9706205 - DSLP GENERAL REPLIES

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: DSLP; a number of general questions.

Position: Standard information provided.

Reasons: General replies generated from past comments on these topics.

XXXXXXXXXX 970620

Attention: XXXXXXXXXX

March 25, 1997

Dear Sirs:

Re: Deferred Salary Leave Plans (DSLPs)

This is in reply to your letter of March 3, 1997 addressed to the Regina Tax Services Office and referred to us for reply. Your questions and our comments are as follow.

Question 1

Does a DSLP need to be formally approved by Revenue Canada prior to its implementation? If so, to whom must an application for approval be made, what are the usual time lines for approval and what charges may be made by Revenue Canada?

Our Comments

A DSLP does not have to be approved prior to its implementation. However, Revenue Canada can provide written confirmation of the tax implications inherent in a particular plan in the form of an advance income tax ruling if one is desired. A request for an advance ruling must be made in the manner set out in the Department's Information Circular 70-6R3, dated December 30, 1996 (enclosed). Replies to ruling requests are given priority by the Department but we can not state how long any particular request may take. In general a ruling on a properly prepared DSLP can be issued within a few weeks. The current hourly fee for a ruling is $90 plus GST.

Question 2

What documentation other than Section 6801 of the Income Tax Regulations (the "Regulations") and ATR-39 are available from Revenue Canada?

Our Comments

Revenue Canada has not published any other documentation specifically on DSLPs.

Question 3

Subparagraph 6801(a)(i) of the Regulations stipulates that an arrangement must not be established to provide benefits to the employee on or after retirement.

(a) If an employee does take early retirement immediately after the leave, what are the consequences to the employee and the employer?

(b) If an employer knows the employee will meet the requirements for early retirement at the end of the leave, when the application to join the deferred plan is made, must the employer deny the application on the possibility that the employee may choose to retire and not return to work?

Our Comments

(a) The Regulation requires an employer and an employee to enter into a written agreement that contains all of the terms specified in the Regulation. In general, Revenue Canada expects the provisions of the agreement to be fulfilled by both parties. However, the Department does recognize that due to changing circumstances, it may be inappropriate to require these terms to be fulfilled in every case. In particular, Revenue Canada will not insist that an employee return to work after a leave of absence provided the parties to the agreement expected the obligation to be fulfilled at all times prior to the commencement of the leave. In this case there are no consequences to either the employer or the employee.

(b) Revenue Canada takes the position that a valid agreement will not exist for the purposes of the Regulation if an employer and employee know at the time the agreement is entered into, that the terms of the agreement will not be satisfied. We would, therefore, consider it prudent for an employer to ascertain the employees intentions at that time, if it is known the employee will be eligible for early retirement on return from the leave of absence.

Question 4

Subparagraph 6801(a)(v) stipulates that an employee must return to employment with the employer or an employer with a similar arrangement, for a period that is not less than the leave of absence. What are the consequences to the employee and employer, if the employee refuses to return to work?

Our Comments

In general, if it is determined that it was known at the time the agreement was entered into that the employee would not return to work, the Regulation will not apply and the employee may be reassessed to include any deferred amounts in income in the years the amounts were deferred. If it is determined that the decision not to return was made at a later date but before the leave of absence was completed, we take the view that the agreement would be terminated from that point in time and would no longer apply to exclude the deferred amount from the employee's income. The employee could therefore be reassessed to include the whole of the deferred amount in income for that year. Finally, if the decision not to return is made during or after the employee was expected to return to employment, we would normally accept the payment and reporting of the deferred amount in accordance with the terms of the DSLP and the Regulation.

Question 5

Are there any limitations on the ability of an employee to opt out of the plan other than those prescribed by the employer in the plan?

Our Comments

We do not have any knowledge of the terms that may be prescribed in a plan by an employer and can not comment on whether they would provide valid reasons to allow an employee to opt out.

A DSLP must be used for the purpose of funding a leave of absence and if an employee is permitted to opt out of a plan at will, it might be considered that the terms of the plan are not consistent with this purpose. We have therefore accepted that an employee can only be allowed to withdraw from a plan in extenuating circumstances and only with the permission of the employer.

We have not attempted to determine what extenuating circumstances might be acceptable. However, in the past we have accepted that an employee may withdraw or be required to withdraw as a result of termination of employment, transfer to an employer which does not participate in a similar plan and financial or other hardship.

Question 6

Is there a time limit by which deferred payments must be paid to an employee who has chosen to opt out of a plan?

Our Comments

We have stated that a payment of the deferred amount must be made within a reasonable period of time after a withdrawal from a plan.

Question 7

Does Revenue Canada have any input as to the administration fees that may be charged to the employee for the administration of a DSLP?

Our Comments

We do not have any particular views on what administration fees may be charged to an employee for the administration of a DSLP. The Income Tax Act (the "Act") in general provides that any expense must be reasonable in the circumstances in order to be deductible in computing income. However, if an administration fee is charged directly to an employee, there is no provision under the Act which would permit its deduction from the employee's income. On the other hand if the amount of the employee's deferred salary is reduced under the terms of the plan and prior to it being payable to the employee, only the net amount would be taxable to the employee.

Question 8

Subparagraph 6801(a)(iii) provides that no salary or wages are to be paid to the employee during the leave of absence other than those under the DSLP and reasonable fringe benefits. Is there a definition of "fringe benefits" for this purpose?

Our Comments

We have not attempted to define the term "fringe benefits" as used in the Regulation but we generally accept that it will have the same meaning as used in general practice. In the past we have accepted that the term includes benefits that an employer would usually provide to the employee in question. We have accepted such items as the continued provision of health care benefits, continued insurance coverage, payment of membership fees, tuition reimbursements and provision of automobiles. On the other hand, we have stated that vacation pay is not a fringe benefit.

We trust the above comments will be of assistance to you.

Yours truly,

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

ENC.