5 January 1998 Internal T.I. 9733237 - INCOME AVERAGING, SDA

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:

1) Would a part-time teacher's averaging of income over the school year result in the creation of an SDA? 2) Would a voluntary leave plan that allows a teacher to cut-back work hours before retiring result in an SDA?

Position:

Question of fact in both cases.

Reasons:

1) Similar to Treasury Board's Leave with Income Averaging Plan which is not an SDA. 2) It appears to be solely a retirement incentive.

                                    			 January 5, 1998

	KINGSTON TAX SERVICES OFFICE	HEADQUARTERS
	Randy Burnette	                M.P. Sarazin
	Acting Director	               957-3499
	Attention: Ken Vankerkhoven
	                             		973323

Salary Deferral Arrangement

This is in response to your memo dated December 12, 1997, wherein you asked us to provide our comments in respect of the letter dated September 8, 1997 that you received from XXXXXXXXXX. Since the issue relates to completed transactions and all of the facts are not known, we will provide you with the following general comments.

Facts

Situation 1 - Collective Agreement

Under a provision of the Collective Agreement, a part-time secondary school teacher may elect, prior to August 1 in any given year, to receive his or her salary for the upcoming school year averaged over the full school year rather than paid as the work is assigned. Consequently, teachers may work only one of the two school semesters and choose to be paid in equal installments over the course of the full year.

Situation 2 - Voluntary Leaving Plan ("VLP")

XXXXXXXXXX (the "Board") has designed and implemented a VLP to encourage teachers that are close to retirement to reduce their work hours and leave so that new teachers can be hired to replace them. Under the VLP, a teacher could work for a period and take the next period off or take a period off and work the following period, and, in either case, his or her income would be averaged over the period that he or she participates in the VLP. The period could be a semester or a school year. Most teachers appear to be participating in the VLP for a two year period by working the first year and taking the second year off. The maximum period that a teacher can participate in the VLP is three years and the teacher must agree to retire at the end of his or her involvement in the VLP. As an incentive, the Board will top-up the averaged pay by as much as 20% (the "Incentive Bonus") in order to bring the teacher's pay to the income level that he or she will receive after retirement.

Comments

Subsection 248(1) of the Income Tax Act (the "Act") defines a salary deferral arrangement ("SDA"), generally, as an arrangement, whether funded or not, under which any person has a right in a taxation year to receive an amount after the year, where it is reasonable to consider that one of the main purposes of the creation of the right is to postpone tax payable in respect of salary or wages for services rendered in the year or a preceding year.

In order to conclude that an election made by a part-time secondary school teacher under this provision of the Collective Agreement would constitute an SDA, we would have to determine that one of the main purposes of the election is to postpone or defer the taxes payable by the part-time teacher in respect of the work assignment. Since each part-time teacher has the option to elect under the provision of the Collective Agreement, the facts relating to each electing teacher would have to be reviewed to determine whether the particular arrangement would constitute an SDA for purposes of the Act. We have opined that agreements under Treasury Board's "Leave with Income Averaging Plan" (the "Leave Plan"), whereunder a participant's pay is averaged and paid throughout the year even though the participant is off on leave for part of the year, are not SDAs for purposes of the Act and we note that there are many similarities between the Leave Plan and the provision under the Collective Agreement. We also note that where a part-time teacher elects every year, there will only be a tax advantage in the first year that the teacher makes the election. Consequently, it may be very difficult to support a conclusion that one of the main purposes of the provision of the Collective Agreement is to postpone income taxes.

We would have to review all of the facts relating to each teacher that participates in the VLP in order to determine whether the teacher's involvement would constitute an SDA for purposes of the Act. Considering the purpose of the VLP and the Board's provision of the Incentive Bonus, it may be very difficult to conclude that one of the main purposes of the VLP is to postpone taxes payable under the Act. The fact that a participant has to agree to reduce his or her working hours and retire immediately after participating in the VLP tends to support the Board's position that the sole purpose of the VLP is to provide a retirement incentive.

In either of the above situations, the leave period may precede the work period. In these cases, an SDA could not exist and the Department's position, in respect of the taxation of amounts received in these cases, is presented in paragraph 4 of Interpretation Bulletin IT-222R.

We trust that the above comments will enable you to respond to the letter from XXXXXXXXXX.

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