24 November 1997 External T.I. 9728775 - DSLP

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:

	Does deferred salary leave plan meet conditions of 	regulation 6801

Position:

No

Reasons:

Several conditions are not met.

972877
XXXXXXXXXX W.C. Harding

Attention: XXXXXXXXXX

November 24, 1997

Dear Sirs:

Re: Deferred Salary Leave Plan (DSLP)

This is in reply to your letter of October 29, 1997, in which you asked for our comments on your proposed DSLP.

In order to defer the taxation of amounts retained under a DSLP the arrangement must be a prescribed plan as set out in paragraph 6801(a) of the Income Tax Regulations (the "Regulations"). This regulation sets out the provisions a plan must contain. It does not, however, require the plan to be approved by the Department in order for it to be accepted.

Confirmation that your plan meets the provisions of paragraph 6801(a) of the Regulations may be obtained, prior to its implementation, in the form of an advance income tax ruling, if a request for the ruling is submitted in the manner set out in the Department's Information Circular 70-6R3, a copy of which is enclosed. However, in response to your request, we have made a preliminary review of the documentation submitted and we can advise that there are a number of deficiencies in your plan which should be amended in order for it to comply with the above-noted Regulations. The problems we have noted are as follows:

1.The DSLP should clearly indicate that it is not established to provide benefits to the participant on or after retirement.

2.Clause XXXXXXXXXX of the plan and paragraph XXXXXXXXXX of the Memorandum of Agreement provide for the payment of interest on the basis that the plan is an investment contract. Clause 6801(a)(iv)(B) of the Regulations requires that any amount in respect of interest or other additional amounts that may reasonably be considered to accrue to or for the benefit of an employee to the end of each taxation year must be paid in the same year. Furthermore, it is the Department's position that these amounts must be treated as employment income for the purpose of the Income Tax Act (the "Act"). In consequence, any amounts paid, must be included on the employee's T4 Supplementary and be subject to normal tax withholdings and remittances.

Further information concerning the reporting of payments out of a DSLP may be found in the Editors Note to the Department’s published Advance Income Tax Ruling ATR-39, a copy of which is enclosed. If additional information is required concerning your responsibility with respect to CPP contributions or the preparation of T4s etc. you may also contact Mr. Pierre M. Paquette at (613) 952-5422 or write to:

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

3.A deferral period is defined in the DSLP as the number of years for which compensation is deferred including any years referred to in clause XXXXXXXXXX (which allows the employer to defer a planned leave of absence for one year) and clause XXXXXXXXXX (which allows a participant to defer the leave of absence for one year). Clause XXXXXXXXXX of the DSLP also provides that a participant may defer amounts for a maximum of six school years. For greater clarity and to conform with the provisions of subparagraph 6801(a)(i) of the Regulations, we suggest that these provisions should also indicate that the deferral period must not, in total, exceed six years from the date deferrals under the plan commence. In terms of your proposed arrangement this means that should an employee elect to defer a portion of their salary for six years as permitted under paragraph XXXXXXXXXX of your agreement, they may not then postpone taking their leave of absence for an additional year. We also suggest that it should further be noted that any suspension of participation under the DSLP as permitted under clause XXXXXXXXXX of the plan, must also be subject to this six year limitation.

4.Not withstanding the provisions for the payment of amounts within certain periods, such as on withdrawal from the plan, in order to comply with subparagraph 6801(a)(vi) of the Regulations, the plan must also provide that all amounts will be paid out of the DSLP no later than the end of the first taxation year that commences after the end of the deferral period.

5.The plan should be amended to provide that, throughout the period of the leave of absence, the employee may 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.

6.Clause XXXXXXXXXX of the DSLP provides the terms for an employee’s reassignment upon the employee's return from a leave of absence. The plan must provide that the employee is to 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.

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