7 July 1998 Income Tax Severed Letter 9800643 - Routine deferred profit sharing plan

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.

SUMMARY: Routine deferred salary leave plan—ITR-6801(a)—Advance income tax ruling - Whether a particular plan is a deferred salary leave sharing plan under paragraph 6801(a) of the Income Tax Regulations.

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: Routine 6801(a) plan.

POSITION: N/A

REASONS: N/A

XXXXXXXXXX 980064 XXXXXXXXXX Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling XXXXXXXXXX (the "Employer") Sabbatical Leave Arrangement for Employees (the "Plan")

This is in reply to your letters dated XXXXXXXXXX, wherein you requested an advance income tax ruling in respect of your proposed Plan.

Facts

1. The Employer files returns at the XXXXXXXXXX Taxation Centre. The Employer's business number is XXXXXXXXXX.

Proposed Transactions

2. The Employer has proposed to establish the Plan. The significant details of the proposed Plan which are relevant to this ruling are as follows:

3. The plan is set up to allow eligible employees who elect to participate in the Plan ("Participants") to defer the receipt of a portion of their gross salary in order to fund a future leave of absence. An eligible employee is a permanent employee of the Employer who has been employed by the Employer for a minimum of five years, who has completed a Memorandum of Agreement (the "Agreement") and whose application for participation in the Plan has been accepted by a Director of the Employer. However, the Directors of the Employer reserve the right to allow any other employee who has not met the five years of employment condition to participate in the Plan.

4. Through the completion of the Agreement, a Participant will notify the Employer as to the % of his or her current salary to be deferred, the length of time that the Employer will be obligated to reduce his or her salary (the "Deferral Period") and the leave period (the "Leave of Absence"). The annual deferral cannot exceed 33 and 1/3% of the Participant's expected annual salary. The Leave of Absence must be for a period of at least six months and must commence immediately after the Deferral Period and under no circumstances will the Leave of Absence commence later than five years after the deferral of salary begins. Where the Leave of Absence will be taken for the purpose of permitting the full-time attendance of the Participant at a designated educational institution (within the meaning assigned by subsection 118.6(1) of the Income Tax Act), the Leave of Absence must be for a period of at least three months.

5. The amounts withheld from the Participant's salary (the "Deferred Amount") will be held in trust. Any income earned by the trust in respect of the Deferred Amount will be paid to the Participant in the year earned and it will be taxed as employment income in the hands of the Participant. All income earned by the trust in a year will be paid in that year and reported on the Participant's T4 Supplementary for that year. The trustees of the trust will be the Employer's Executive Councillors.

6. During the Leave of Absence, Participants are not entitled to receive any salaries or wages from the Employer or from a person or partnership with whom the Employer does not deal at arm's length, except the Deferred Amount and such reasonable fringe benefits that the employer usually pays to or on behalf of employees. In keeping with the Income Tax Regulations (the "Regulations"), once a Leave of Absence has commenced, the Participant must remain off work until the completion of the Leave of Absence.

7. The Plan provides that the Participant is obligated to return to work for a period, after the Leave of Absence, which is not less than the period of the Leave of Absence.

8. The payment of salary and benefits during the Deferral Period and the Leave of Absence shall be as follows:

(a) During the Deferral Period, the Participant will be paid a reduced percentage of salary, in accordance with the terms chosen by the Participant.

(b) During the Leave of Absence, the Participant will be paid a monthly installment equal to the Deferred Amount held on behalf of the particular Participant divided by the number of months that the particular Participant will be away on his or her Leave of Absence. The monthly installments will commence one month following the start of the Leave of Absence. All of the Participant's Deferred Amounts will be paid to the Participant before the end of the first taxation year commencing after the end of the Deferral Period.

(c) During the Leave of Absence, the Participant will not accumulate nor be entitled to any salary increments in respect of the Leave of Absence period or statutory holidays, maternity, sick or other leaves or promotions.

(d) During the Deferral Period and the Leave of Absence, the applicable health and welfare benefits computed by reference to salary and provided by the Employer shall be structured so that the Participant's benefits will be based on the Participant's current salary before the reduction for the deferred portion. The Employer will continue to pay applicable benefits and other premiums for the Participant during the Leave of Absence.

(e) During the Deferral Period, Canada Pension Plan contributions and income tax deductions will be based upon the salary actually received by the Participant. During the Leave of Absence, Canada Pension Plan contributions and income tax deductions will be based on the deferred amount paid to the Participant. The Employer will maintain its share of Canada Pension Plan contributions during both the Deferral Period and the Leave of Absence period. Employment Insurance premiums will be based upon the Participant's full salary during the Deferral Period. This ensures that if the Participant is laid-off or terminated during the Deferral Period, his or her entitlement to Employment Insurance benefits will be calculated on full salary amounts. During the Leave of Absence period, there are no deductions for Employment Insurance because the Leave of Absence is not considered to be insurable employment.

(f) Following the Leave of Absence, the Participant will resume employment with the Employer in the same or similar arrangements for a period of time not less than the duration of the Leave of Absence period.

(g) Participants in the Plan may not withdraw from the Plan other than on cessation of employment with the Employer or in extenuating circumstances, such as financial hardship, where such withdrawal has been approved by the Directors of the Employer.

(h) If a Participant dies before taking his or her Leave of Absence, the Deferred Amount will be paid to the Participant's estate within 60 days of the Employer receiving notification of the Participant's death.

9. The Plan is not established to provide retirement benefits.

Purpose of the Proposed Transaction

10. The purpose of the Plan is to permit eligible employees to take a Leave of Absence without pay which will be financed through the deferral of the employee's current salary.

Additional Information

11. To the best of your knowledge and the knowledge of the Employer, none of the issues involved in this ruling request is being considered by a tax services office or taxation centre in respect of a return already filed and none are under objection.

Ruling

Provided that the terms and conditions of the Plan are accurate, the above information constitutes complete disclosure of the relevant facts, and the Plan is implemented as proposed, we rule that:

A. The Plan will satisfy the requirements set out in paragraph 6801(a) of the Regulations and will therefore be excluded from the definition of a "salary deferral arrangement" as that term is defined in subsection 248(1) of the Income Tax Act.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, and is binding provided that the Plan is implemented within six months of the date of this letter.

Yours truly,

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