12 August 1997 External T.I. 9715715 - SALARY DEFERRAL ARRANGEMENT REG. 6801(A)

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 a Deferred Salary Leave Plan meets the requirements of a prescribed plan?

Position:

Discussed certain requirements necessary to be a prescribed plan.

Reasons:

Paragraph 6801(a) of the Regulations

971571
XXXXXXXXXX Franklyn S. Gillman

Attention: XXXXXXXXXX

August 12, 1997

Dear Sirs:

Re: Deferred Salary Leave Plan

This is in reply to your request to the XXXXXXXXXX Tax Services Office as to whether a proposed deferred salary leave plan (the "Plan") which is explained in detail in your above mentioned request meets the requirements to be a prescribed plan pursuant to paragraph (l) of the definition "salary deferral arrangement" in subsection 248(1) of the Income Tax Act (the "Act"), which has been forwarded to us for our comments.

Arrangements to defer receipt of part of an employee's income and fund a leave of absence pursuant to a written agreement must comply with paragraph 6801(a) of the Income Tax Regulations (the "Regulations") which itemize the requirements an arrangement must contain in order to qualify as a prescribed plan. Such a plan, commonly referred to as a deferred salary leave plan does not have to be approved by the Department for it to comply with the provisions of paragraph 6801(a) of the Regulations. However, a confirmation that your Plan does meet these provisions can be obtained in the form of an advance income tax ruling if you so desire and a request for it is submitted in the manner set out in Information Circular 70-6R3, a copy of which is enclosed.

Our review of the documents you submitted indicates that there are a number of deficiencies which should be amended to ensure that the Plan complies with the Regulations. These include:

The Plan should clearly indicate that it is not established to provide benefits to the participants on or after retirement.

The Regulations require that the minimum leave of absence shall be for a period of three (3) consecutive months if the leave of absence is for the purpose of permitting the full-time attendance of the employee at a designated educational institution within the meaning of subsection 118.6 of the Act. In any other case, the leave of absence must be for a period of not less than six (6) consecutive months. If the Plan only permits leaves of one year it complies with this provision, otherwise this should be included.

The Plan provides that the employee may withdraw from the Plan "at any time" during the deferred period provided it is done "XXXXXXXXXX" . A voluntary withdrawal provision of this nature may indicate that the main purpose of the Plan is not designed to permit the employee to fund a leave of absence but rather to defer income taxes. Paragraph XXXXXXXXXX of the Plan should be amended to provide an employee with the right to withdraw from the Plan only in limited situations, such as, financial or other hardship.

The Plan should provide in the event the employee withdraws from the Plan, the entire deferred amount including any accumulated interest shall be paid to the employee within a reasonable period of time. A period of sixty days has been accepted by the Department as a reasonable period of time.

Subparagraph 6801(a)(i) of the Regulations provides that a leave of absence must commence immediately after the deferral period and that the deferral period must not exceed 6 years from the date on which the deferrals are commenced. In our view, the Plan should clearly provide that, under no circumstances will a deferral period in excess of 6 years be allowed. Accordingly, paragraph XXXXXXXXXX should be amended to indicate that the leave of absence must commence not more than 6 years from the beginning of the deferral period. Should any postponement cause the leave of absence to commence at a later time, the Plan would no longer meet the requirements of being a prescribed plan.

The Plan should be amended to provide that, throughout the period of the leave of absence, the employee does not receive any salary or wages from the employer or from a person with whom the employer does not deal at arm's length other than the amount by which the employee's salary under the Plan was deferred or is to be reduced and reasonable fringe benefits.

Subparagraph 6801(a)(iv) of the Regulations provides that the deferred amounts be held in trust or by or for the account of either an employee benefit plan or another person, signifying that the deferred amounts are not paid to the employee until the leave period commences. Accordingly, paragraph XXXXXXXXXX should be amended so that the deferred amounts are not paid into an account in the name of each employee, but are held in trust or by or for the account of a person on behalf of the employee.

The Plan must provide that the deferred amount is paid to the employee during the leave of absence. Accordingly, paragraph XXXXXXXXXX should be amended so that the employee does not have the option of receiving the deferred amount in one or two lump sums payments prior to the commencement of the leave. Otherwise the main purpose of the Plan may be perceived as a tax deferral arrangement as opposed to being an arrangement designed to permit the employee to fund a leave of absence.

Pursuant to subparagraph 6801(a)(iv) of the Regulations, the Plan must provide that any interest or additional amounts (capital gains) that may reasonably be considered to have been earned for the benefit of the employee in a year must be paid in that year to the employee. These amounts are to be treated as employment income for the purpose of the Act. Consequently, the amounts, when received, must be included on the employee's T4 Supplementary and the usual tax withholdings and remittances must be made. Accordingly, paragraphs XXXXXXXXXX should be amended. In addition an additional paragraph should be added to provide for the way interest will be treated as above mentioned.

To comply with subparagraph 6801(a)(vi) of the Regulations, the Plan must provide that all amounts will be paid out of the Plan no later than the end of the first taxation year that commences after the end of the deferral period.

Subparagraph 6801(a)(ii) of the Regulations requires that the percentage deferred in any taxation year of the employee shall not exceed 33 1/3% of the amount of salary that the employee would normally receive in that year. A taxation year for an individual is the calendar year. The Plan should indicate that in no event can the deferred salary exceed such maximum in any one calendar year.

Comments

The following comments reflect the Department's position concerning Employment Insurance premiums and Canada Pension Plan contributions. You may wish to include some or all of the following comments in the Plan.

Employment Insurance

Employment insurance premiums are to be based on the employee's gross salary during the deferral period and no premiums are to be withheld from the deferred amounts when paid to the employee during the leave period.

Canada Pension Plan ("CPP")

CPP contributions are to be based on the employee's salary net of the deferred amounts during the period of deferral and on the deferred amounts when paid to the employee during the leave period. When the deferred amounts are paid to the employee by a trustee of the Plan during the leave period, that trustee is deemed by the CPP Act to be an employer of the employee and is therefore required to pay the employer's CPP contribution in respect of that employee. Where the trustee/employer recovers the employer's CPP contribution from amounts otherwise payable to the employee, it is our view that this recovered amount will not be part of the employee's gross salary from that trustee/employer and therefore need not be included on the employee's T4 slip.

Although the trustee is deemed under the CPP Act to be an employer, the employee does not enter into new employment with the trustee when he goes on leave. Consequently, while CPP contributions that are required to be paid during the leave period are to be deducted and remitted by the trustee as by any other employer, CPP contributions paid in the year prior to the leave period must be taken into consideration by the trustee. For example, if the required CPP contributions for a year by an employee were $700 and the employee contributed $500 before going on leave, the trustee would be required to deduct and remit CPP contributions for that year of $200 on behalf of the employee, plus the employer's portion.

The trustee will be required to prepare T4s reflecting the amount paid by the trustee to the employees under the Plans and, among other things, the CPP contributions. However, since CPP contributions made during the year prior to the leave period are to be taken into consideration by the trustee, the amount of contributory earnings reported by the trustee may not coincide with the earnings reported in box "C" for that particular year. If such is the case, the amount of contributory earnings must be recorded in box "I" of the T4 which should in turn coincide with the amount of contributions reported in box "D". There may also be instances where the trustee will not have made any deductions for CPP because the employee reached the maximum contributions prior to the leave period. If such is the case, a check mark should be indicated in box "J" of the T4 under CPP.

If further information is required concerning the trustee's responsibility with respect to CPP contributions or the preparation of T4s etc., the enquiry should be directed to Mr. Pierre M. Paquette at (613) 952-5422 or to the following address:

CPP/EI Eligibility Division
Revenue Canada Taxation
400 Cumberland
7th Floor
Ottawa, Ontario
K1A 0L8

If the Plan is amended as discussed above, it is our opinion that it will meet the requirements of paragraph 6801(a) of the Regulations. You are advised that this letter is not an advance income tax ruling but is merely a statement of opinion on the specifics of your proposed Plan and it is not binding on the Department.

We include for your information a copy of ATR-39 as a model of a Plan that meets the requirements of section 6801 of the Regulations.

We trust, however, that our comments will be of assistance.

Yours truly,

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

encl.