19 November 1998 External T.I. 9820145 - REVIEW OF A DEFERRED SALARY LEAVE 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.

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: Whether Plan meets requirements of paragraph 6801(a) of the Regulations.

Position: No

Reasons: It should be amended to include:

1. Plan must be in writing.

2. No benefit to be provided on or after retirement.

3. Leave of absence period is to commence immediately after a period not exceeding six years.

4. Income earned will be paid on December 31 of each year.

5. No salary, except deferred amount, would be paid in the LAP.

6. Deferred salary is to be paid no later than the end of the first taxation year that commences after the deferral period.

7. Participant must return to work for a minimum of one year.

8. Employee cannot withdraw from the Plan in circumstances other than financial or other hardship.

XXXXXXXXXX 5-982014
Fouad Daaboul
Attention: XXXXXXXXXX

November 19, 1998

Dear Sirs:

Re: Deferred Salary Leave Plan (the "Plan")

This is in reply to your letter of July 30, 1998, with an enclosed copy of your draft Plan.

Our review of the Plan indicates that there are a number of deficiencies which should be amended to ensure that the Plan complies with paragraph 6801(a) of the Income Tax Regulations. These include:

1. The Plan must be in writing between the XXXXXXXXXX (“Employer”) and the participant employee (“Employee”).

2. The Plan must provide that the arrangement is not established to provide benefit to the Employee on or after retirement.

3. The Plan must provide that the leave of absence period (the "LAP") is to commence immediately after a period not exceeding six years after the date the salary deferrals commence.

4. The Plan should provide that interest or any income earned on the deferred amount must be paid to the Employee on December 31 of each year during the deferral period.

5. The Plan must provide that throughout the leave of absence period, the Employee does 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. The Plan must provide that all amounts held under the arrangement will have to be paid to the Employee no later than the end of the first taxation year that commences after the deferral period.

7. The Plan must provide that following the LAP, the Employee must return to her or his regular employment with the Employer for a minimum of one year.

8. The Plan should provide that the Employee may not withdraw from the Plan in circumstances other than financial or other hardship, otherwise it may indicate that the main purpose of the Plan is to defer taxes rather than permit Employees to fund a leave of absence. However, where the Employee does not take the leave of absence, the salary deferral arrangement will be terminated and the deferred amounts should be paid within a reasonable period of time.

If the Plan is amended as discussed above, it is our opinion that it will meet the requirements of paragraph 6801(a) of the Income Tax Regulations. You are advised that this letter is not an advance income tax ruling but is merely a statement of opinion on the specifics of your proposed Plan and it is not binding on the Department. We trust, however, that our comments will be of assistance.

For your information, we enclose the Department's publication ATR-39 which describes a deferred salary leave plan that complies with the requirements of section 6801 of the Regulations.

Yours truly,

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