13 November 1997 External T.I. 9727725 - SALARY DEFERRAL AND CONSTRUCTIVE RECEIPT

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:

Will there be constructive receipt in an employee incentive arrangement where no entitlement to amounts exist before a specific date but the employees can direct the form funds will be invested in.

Position:

File deals with an actual proposal so no specific answer was provided. We restated our 1984 round table answer and advised that in general no constructive receipt should arise in such arrangements.

Reasons:

No prior letters specific to the question were located. Many DPSPs and other legislated plans provide this kind of investment option but these have specific rules for income inclusion.

In most cases we would expect that the right to an amount would be subject to conditions precedent so constructive receipt should not normally arise.

972772
XXXXXXXXXX W.C. Harding

Attention: XXXXXXXXXX

November 13, 1997

Dear Sirs:

Re: Constructive Receipt under a Deferred Bonus Plan

This is in reply to your letter of October 17, 1997, in which you requested our comments on whether constructive receipt would exist where employees may direct the form of investment deferred bonuses may be held in under a proposed deferred bonus plan.

Since the interpretation you seek relates to a proposed transaction to be undertaken by you, we bring to your attention the enclosed Information Circular 70-6R3 dated December 29, 1996, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. Accordingly if you wish to obtain an advance income tax ruling with respect to the specific transactions you are proposing, a written request must be submitted in accordance with the Information Circular. As an alternative, we can provide the following general comments on constructive receipt which may be of assistance to you.

In its response to Question 13 at the 1984 Revenue Canada Round Table published in the Report of the Thirty-Sixth Tax Conference, 1984, the Department stated that "constructive receipt is considered to occur in situations where an amount is credited to an employee's debt or account, set apart for the employee, or otherwise available to the employee without any restriction concerning its use". Where at any particular time, a plan or arrangement does not provide an employee with such access to funds held under the arrangement, we would not generally consider constructive receipt to exist at that time even though the employee may give directions as to the form of investment in which the funds are to be held.

We would also like to note that an arrangement to defer the payment of bonuses for up to three years is excluded from the definition of a salary deferral arrangement by paragraph (k) thereof. However, depending on the provisions of a plan, this exclusion may not extend to deferred amounts earned on the investment of such bonuses.

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