28 July 1997 External T.I. 9714245 - 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 Is plan acceptable under 6801

Position:		            No

Reasons: Numerous errors

XXXXXXXXXX 971424

Attention: XXXXXXXXXX

July 28, 1997

Dear Sirs:

Re: Deferred Salary Leave Plan ("DSLP")

This is in reply to your letter of March 17, 1997, addressed to the Vancouver Tax Services Office and referred to us for reply.

In your letter you noted your DSLP was approved by Revenue Canada at the time it was established. However, as discussed during our telephone conversation of June 6, 1997, (XXXXXXXXXX-Harding) there is no requirement that a DSLP has to be approved by Revenue Canada. We also could not find any record of our having issued an advance income tax ruling in respect of your plan. An advance income tax ruling is a binding confirmation by the Department of the tax implications that will apply in respect of particular proposals.

At this time, a ruling with respect to your plan, can not be issued since the plan already exists. We also must advise, that, in our opinion, your DSLP is not 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.

The problems with the plan that we have identified are as follows:

The plan does not clearly indicate that it has not been established to provide benefits to employees on or after employment. Clause XXXXXXXXXX of the plan contemplates an employee's return to employment. However, to be in accordance with the provisions of subparagraph 6801(a)(v) of the Income Tax Regulations (the "Regulations"), your plan must provide that employees must 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.

Clause XXXXXXXXXX of the DSLP provides that "interest in accordance with Clause XXXXXXXXXX shall be paid out to each participant in accordance with current Income Tax Laws". XXXXXXXXXX to the DSLP then states "Current tax laws require interest to be paid out on a yearly basis. Interest will be paid in January for the period ending December 31st."

Neither the Income Tax Act nor the Regulations require the payment of interest at any specific time. However, to meet the requirements of subparagraph 6801(a)(iv) of the Regulations, a plan must provide for the payment of any interest or other income to beneficiaries in the same year it is earned. Accordingly, since your plan does not provide for the payment of any interest until the following year, it does not comply with the Regulations.

Clause XXXXXXXXXX of the DSLP allows the employer to defer a leave of absence for one year. This provision should also indicate that the leave period must still commence no later than 6 years after the date deferrals for the leave of absence commenced.

The DSLP does not comply with the provisions of subparagraph 6801(a)(iii). The DSLP must provide that throughout the leave of absence the employee will not receive any salary or wages from the employer, or from any other person or partnership with whom the employer does not deal at arm's length, other than the deferred amounts payable under the DSLP, any interest earned thoron, and any reasonable fringe benefits that the employer usually pays to or on behalf of its employees.

Clause XXXXXXXXXX of the DSLP allows the employee to suspend participation in the plan for one year. This provision should also indicate that the leave period must still commence no later than 6 years after the date deferrals for the leave of absence commenced.

Because of these problems, we have referred your file to Mr. Luciuk, the Interim Director of the Vancouver Tax Services Office in order that he may assign an officer to assist you in determining the most appropriate basis for correcting any problems that may have arisen. Mr. Luciuk may be contacted by telephone at 691-4554.

We trust these comments will be of assistance to you.

Yours truly,

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

c.c. D. Luciuk

Vancouver Tax Services Office