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:
Must an employee’s return to work follow immediately after a leave of absence in order for a plan to meet the requirements of 6801(a)?
Taxation of “retirement gratuity”
Position:
If the terms of the arrangement allow (or are modified to allow an employee to return at a date that is later than expected, we would accept that it effectively extends the leave of absence. Therefore the requirement would still be fulfilled provided the employee returns to work for a period that is at least as long as the extended leave.
A retirement gratuity will be taxable as employment income unless there is a retirement or loss of job in which case it will be taxable as a retiring allowance.
Reasons:
Unless a period of extended absence is not considered to be a part of the “leave of absence” it is reasonable to assume that a later return date will extend the leave period. In any event the law only requires a “return” to work after the leave period for a period equal to the leave of absence. It does not state when that return must occur.
With respect to retiring allowances it is a routine application of the law.
XXXXXXXXXX 981509
W. C. Harding
August 11, 1998
Dear XXXXXXXXXX:
Re: Deferred Salary Leave Plans (“DSLP’s”)
Requirement to Return to Work
This is in reply to your facsimile of June 9, 1998, in which you requested clarification of the requirements of paragraph 6801(a) of the Income Tax Regulations (the “Regulations) which require an employee to return to work after a leave of absence.
Where a DSLP meets the conditions in paragraph 6801(a) of the Regulations, the arrangement will not be a “salary deferral arrangement” as that term is defined in the Income Tax Act (the “Act”), and any amounts deferred under the plan will not be included in a participant's income until they are received under the terms of the plan
One of the requirements of the Regulations is that a DSLP must include a requirement for a participant to return to his or her 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. If the terms of the arrangement allow (or are modified to allow) an employee to return to work at a date that is later than originally expected, we would accept that it effectively extends the leave of absence and that the requirement would still be fulfilled provided the employee agrees to return to work for a period that is at least as long as the extended leave.
Where a condition in paragraph 6801(a) will not be complied with, a participant will be considered to have terminated or withdrawn his or her participation in the plan. For example, this would occur where a participant decides not to return to work after a leave of absence or does not agree to return for a period equal to the leave of absence. However, the determination of when an individual's participation in a DSLP would be considered to terminate for purposes of the Act would require a review of all of the facts relating to each particular case. If it is determined that it was known, at the time an agreement was entered into that the participant would not be returning to work, then the DSLP would not have met the conditions of paragraph 6801(a) of the Regulations and the participant could be reassessed to have deferred amounts included in his or her income in the years that amounts were deferred. If it is determined that the decision not to return was made at a later date, we take the view that the agreement would be terminated from that point in time and the participant could be reassessed to have the deferred amounts included in his or her income for that year.
A retirement gratuity will be treated as ordinary income from employment if it is received prior to the actual date of retirement. If it is received after retirement it may be treated as a retiring allowance. Detailed information on the taxation of retiring allowances can be found in the Department’s Interpretation Bulletin IT-337R3 which is available at your local Tax Services Office.
We trust these comments will be of assistance to you.
Yours truly,
Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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