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 Plan meets requirements of section 6801 of the Regulations.
Position:
No
Reasons:
It should be amended to include:
1- Designated educational institution within the meaning of ss 118.6(1).
2- Continuity of the status of an employee (full-time or part-time).
3- Amount earned by the deferred amounts including interest must be paid out.
4- During the leave of absence period, employee will be qualified to receive only: salary deferred under the Plan and reasonable fringe benefits.
5-Employee can not withdraw from the Plan except by reason of financial or other hardship.
972510
XXXXXXXXXX Fouad Daaboul
Attention: XXXXXXXXXX
November 24, 1997
Re: XXXXXXXXXX
Deferred Salary Leave Plan (the "Plan")
This is in reply to your letter of September 22, 1997 with an enclosed copy of your draft Plan.
A deferred salary leave plan does not have to be approved by the Department for it to comply with the provisions of section 6801 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 request for it is submitted in the manner set out in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada.
Our review of the Plan indicates that there are a number of deficiencies which should be amended to ensure that the Plan complies with the Regulations. These include:
1.For the purposes of your policy XXXXXXXXXX (General Policies of the Plan), the Plan must specify that a designated educational institution is an institution within the meaning of subsection 118.6(1) of the Income Tax Act (the "Act").
2.Because eligible employees can be either full-time or part-time, the Plan should specify the continuity of the status of an employee (i.e., a full-time employee will be back to work on the same status).
3.The Plan should provide that not only interest, as stipulated under your policy XXXXXXXXXX (Income Tax), but also any amount earned by the deferred amounts must be paid out as indicated.
4.The Plan must provide that throughout the leave of absence period, 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.
5.The Plan should provide that the employee may not withdraw from the Plan in circumstances other than financial or other hardship, otherwise it may indicate that the main purpose of the Plan is to defer taxes rather than permit employees to fund a leave of absence (see policy XXXXXXXXXX). However, where the employee does not take the leave of absence, the salary deferral arrangement will be terminated and the deferred amounts should be paid within a reasonable period of time.
6.For greater certainty, policy XXXXXXXXXX could provide that all amounts held under the arrangement will have to be paid to the employee no later than the end of the first taxation year that commences after the deferral period.
You may wish to include some of the following comments in the Plan to complete your policy XXXXXXXXXX on Canada Pension Plan ("CPP") which reflect the Department's position.
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
7th Floor
400 Cumberland St.
Ottawa ON 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 trust, however, that our comments will be of assistance.
For your information, we enclose the Department's publication ATR-39 which describes a deferred salary leave plan that complies with the requirements of section 6801 of the Regulations.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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