13 August 1998 Internal T.I. 9818587 - DEFERRED SALARY LEAVE PLANS

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 the subject plan comply with the provisions of paragraph 6801(a) of the Regulations?

Position: No.

Reasons:

Contravenes various provisions of paragraph 6801(a) of the Regulations.

		August 13, 1998

CALGARY TAX SERVICES OFFICE HEADQUARTERS
G. Burke, Acting Director W.C. Harding
(613) 957-8953
Attention: Greg Randall
981858

XXXXXXXXXX
Deferred Salary Leave Plan (the “Plan”)

This is in reply to your facsimile of July 17, 1998, in which you asked us to confirm whether the above noted Plan met the conditions of paragraph 6801(a) of the Income Tax Regulations (the “Regulations”).

As discussed during our telephone conversation of July 16, 1998 (Harding/Randall) your primary concern is that while the Plan provides for the withholding of amounts from salary, it does not provide for the payment of these funds during the leave of absence. Instead the Plan provides for the payment of amounts during the leave equal to XXXXXXXXXX% of the normal salary payable at the end of the deferral period.

We have reviewed the terms of the Plan and note that Article XXXXXXXXXX of the Plan provides for the payment of contributions made under the terms of the plan to employees during the leave of absence, including contributions made under the terms of the Plan that are equal to the interest earned under the plan from year to year. We also note that the Plan provides that the employer will make these payments at a rate equivalent to XXXXXXXXXX% of the gross monthly salary in effect immediately prior to the leave.

It appears that the intent of these provisions is to have participants fund the plan with sufficient contributions so that the participant’s salary over the 5 year period of the Plan will be paid at a constant rate equal to XXXXXXXXXX% of the normal salary that would otherwise be payable during the period. In general, this result will be achieved under the terms of the Plan if the total contributions, including interest earned over the 5 year period, is equal to XXXXXXXXXX% of the final salary payable prior to the leave period. However, it appears to us that, if the interest earned under the terms of the plan is deficient, the employer will be obligated to fund the shortfall. On the other hand, the Plan is silent on what will happen if there are surplus funds derived from interest earned in the plan. Nevertheless, since these are considered employee contributions, we would expect they would be returned to the employee.

There is nothing within the intent of these terms which is contrary to the provisions of paragraph 6801(a) of the Regulations. However, the employer may wish to reconsider how the terms can be properly administered. In particular, the Plan provides that all contributions will be made in trust and this generally means they plan to create an “employee benefit plan” ( an “EBP”) as defined in the Income Tax Act (the “Act”) to hold the funds. However, the Plan does not provide for such a trust to make any payments during the leave and instead provides for the employer to make all required payments. Furthermore there are no provision in the Plan to provide for the withdrawal of amounts out of the trust and there are no provisions for the reporting of these amounts in accordance with the provisions of paragraph 6(1)(g) or section 32.1 of the Income Tax Act (the “Act”) if it is in fact an EBP. This situation could result in some unintended results.

It may also be possible that there was no intention to have funds “held in trust” under the terms of the plan and that the term was simply misused. If this is the case there would not be an EBP and all amounts paid by the employer would simply be paid as income from employment.

We have also noted a number of other deficiencies in the plan that should be addressed. These are as follow:

1. Article XXXXXXXXXX of the Plan excludes the reporting of interest as employment income. As noted above, interest earned in a trust governed by the plan must be treated as benefits from an EBP (or as ordinary employment income if an EBP does not exist) and must be reported annually by the recipient as income from employment as provided under paragraph 6(1)(g) of the Act;

2. The plan does not comply with the provisions of subparagraph 6801(a)(iii) of the Regulations in that it does not provide that throughout the leave of absence the employee will not receive any salary or wages from the employer, or from any other person or partnership with whom the employer does not deal at arm’s length, other than amounts payable under the plan or reasonable fringe benefits that the employer usually pays; and

3. Article XXXXXXXXXX of the Plan is insufficient. Subparagraph 6801(a)(vi) of the Regulations requires that a plan must provide for the payment of all amounts held under the plan no later than the end of the first year that commences after the end of the deferral period. However, this provision presumes that a plan will meet the provisions of the Regulations at all relevant times. Where a condition in paragraph 6801(a) of the Regulations will not be complied with, a participant will be considered to have terminated or withdrawn his or her participation in the plan such that the salary deferral arrangement provisions of the Act will apply. This would occur for example, where a participant decides not to take a leave of absence as provided under the plan.

The determination of when an individual's participation in a plan that complies with the Regulations 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 take the leave it would be our opinion that the plan did not meet the conditions of paragraph 6801(a) of the Regulations at any time and the participant could be reassessed to have deferred amounts included in his or her income in the years that amounts were deferred. However, if it is determined that the decision not to take the leave was made at a later date we would take the position 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.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

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