19 May 1999 External T.I. 9833905 - DSLP 6801(A) - NEW T4 REFERENCES

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 administered or amended to include:

Arrangement must be in writing between employer and each employee.

No benefit to be provided on or after retirement.

Payment is to be made within 60 days of time when employee is aware he/she will fail to take a leave of absence.

Several references to other clauses in the Plan should be revised.

Interest or any income generated by deferred compensation amounts, payable each December 31, should be reported on a T4 Supplementary.

Payments during leave shall exclusively be related to moneys retained and fringe benefits excluding vacation.

Return to work is for at least one-year period since this is the only possible leave length.

Payment in cases of withdrawal shall be made by way of lump sum equal to the deferred amount less applicable withholdings.

Clause XXXXXXXXXX (on-year-break of retained deferrals) should be deleted as the Plan would no longer be established for the main purpose of funding a leave, but may then be established to postpone tax payable on moneys that would otherwise become payable within 60 days by virtue of clause XXXXXXXXXX .

XXXXXXXXXX 								983390
P. .-A. Sarrazin
Attention:  XXXXXXXXXX 

May 19, 1999

Dear Sirs:

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

This is in reply to your letter of December 7, 1998, which included a copy of your draft Plan.

A deferred salary leave plan does not have to be approved by this Department in order for it to comply with the provisions of section 6801 of the Regulations. However, a confirmation that your Plan does satisfy these provisions can be obtained in the form of an advance income tax ruling if you so desire and if a request for it is submitted in the manner set out in Information Circular 70-6R2, a copy of which is enclosed.

While we can not issue an advance tax ruling at this time, we have reviewed your Plan and are of the opinion that it will be a prescribed plan under paragraph 6801(a) of the Regulations provided it is amended and/or administered as discussed below. Please note however that these are only statements of opinion on the specifics of your proposed Plan and as such are not binding on the Department.

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:

The Plan must provide that an arrangement in writing will be entered into between the XXXXXXXXXX ("Employer") and each participant employee ("Employee"), reflecting the terms of the Plan. The last sentence of clause XXXXXXXXXX could easily be amended accordingly.

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

In case of failure by a participant to take leave, clause XXXXXXXXXX provides for the payment of deferred amounts to the participant no later than the end of the first taxation year that commences after the deferral period. Regulation 6801(a) requires this in cases where the Plan is carried through. This requirement was not meant to apply to an employee who has withdrawn from the arrangement, who will not be taking a leave of absence or who commences but does not complete the required minimum period of leave. Therefore, clause XXXXXXXXXX should be amended to require the payment be made within a reasonable period of time, or within sixty days as provided for in clause XXXXXXXXXX of the Plan (withdrawal).

“Accrued Interest” is defined in clause XXXXXXXXXX of the Plan. Reference is made therein to clause XXXXXXXXXX. We believe reference should have been to clause XXXXXXXXXX of the current draft Plan. We also remind you that interest payments under the Plan must be reported on the employee’s T4 supplementary since they form part of the employee’s remuneration as opposed to investment income, and the usual tax withholdings and remittances must be made on these payments.

Clause XXXXXXXXXX suggests that accrued interest is to be paid to a participant: we remind you that this includes interest or any other income generated by the deferred compensation amount.

“Leave of absence” is defined under clause XXXXXXXXXX of the Plan. Reference therein is made to clause XXXXXXXXXX, whereas we believe it should be made to clause XXXXXXXXXX of the current draft Plan.

“Agreement” is also defined under clause XXXXXXXXXX of the Plan, but is not placed in alphabetical order.

Clause XXXXXXXXXX deals with the amount of payment to be paid to a participant during leave. For greater certainty and for clarification purposes, the first sentence could be reworded so that it is clear that the amount to be paid shall exclusively be related to the moneys retained by the board and any fringe benefits excluding vacation.

Clause XXXXXXXXXX deals with the return to employment condition. For clarity reasons and since the Plan provides for only one possible period length of leave of absence (1 year), it could be appropriate to refer to a return to employment for a period of at least 1 year.

Clauses XXXXXXXXXX deal with withdrawal issues. In all three clauses, reference is made to the payment of a lump sum to the participant or the participant’s estate. For greater certainty, it should be made clear that the payment of the lump sum shall be equal to the deferred compensation amount less applicable withholdings.

Clause XXXXXXXXXX contravenes Regulation 6801(a) which requires the Plan to be established for the main purpose of permitting the employee to fund, through salary or wage deferrals, a leave of absence from the employee’s employment. This one-year break in salary deferrals does not contribute in the funding of a leave of absence. Furthermore, it could serve as an alternative vehicle, for an employee wishing to withdraw from the Plan, to defer tax on income which would otherwise result from the payment within sixty days made in accordance with clause XXXXXXXXXX. In such a case, it would be open to the Department to apply the SDA rules by considering that one of the main purposes of the Plan is to postpone tax payable under the Act. Clause XXXXXXXXXX should therefore be excluded from the Plan.

“Current Compensation Amount” is defined under clause XXXXXXXXXX of the Plan, and means the total compensation payable by the board to the participant for the school year, including his or her proper grid salary and all allowances, per the current collective agreement in force between the association and the board. Please note the following:

1. It is the Department's position that Canada Pension Plan ("CPP") premiums are to be based on the employee's salary net of the deferred amounts during the period of deferral and on the deferred amounts then paid to the employee during the leave period. When the deferred amounts are paid to the employee by a trustee of the Plan during the leave period, that trustee is deemed by the CPP Act to be an employer of the employee and is therefore required to pay the employer's CPP contribution in respect of that employee. Where the trustee/employer recovers the employer's CPP contribution from amounts otherwise payable to the employee, it is our view that this recovered amount will not be part of the employee's gross salary from that trustee/employer and therefore need not be included on the employee's T4 slip.

Although the trustee is deemed under the CPP Act to be an employer, the employee does not enter into new employment with the trustee when he goes on leave. Consequently, while CPP contributions that are required to be paid during the leave period are to be deducted and remitted by the trustee as by any other employer, CPP contributions paid in the year prior to the leave period must be taken into consideration by the trustee. For example, if the required CPP contributions for a year by an employee were $600 and the employee contributed $400 before going on leave, the trustee would be required to deduct and remit CPP contributions for that year of $200 on behalf of the employee, plus the employer's portion.

The trustee will be required to prepare T4s reflecting the amount paid by the trustee to the employees under the Plan and, among other things, the CPP contributions. However, since CPP contributions made during the year prior to the leave period are to be taken into consideration by the trustee, the amount of contributory earnings reported by the trustee may not coincide with the earnings reported in box "C" for that particular year. If such is the case, the amount of contributory earnings must be recorded in box "I" of the T4 which should in turn coincide with the amount of contributions reported in box "D". There may also be instances where the trustee will not have made any deductions for CPP because the employee reached the maximum contributions prior to the leave period. If such is the case, a check mark should be indicated in box "J" of the T4 under CPP.

If further information is required concerning the trustee's responsibility with respect to CPP contributions or the preparation of T4s etc., the enquiry should be directed to:

Coverage Policy and Legislation Section
Source Deductions Division
Revenue Canada Taxation
875 Heron Road

Ottawa ON K1A 0L8.

2. Unemployment Insurance Premiums are to be based on the participant's gross salary before deferrals during the period of deferral and no premiums are be withheld from the deferred amounts when paid to the participant during the leave period.

3. Benefits under a Registered Pension Plan may be accrued during a deferral period and during a leave of absence only in accordance with the terms of the Registered Pension Plan. However, a pension plan may be drafted to provide for the continuation of benefits during periods of reduced pay in accordance with Regulation 8508.

Reference is made, under clause XXXXXXXXXX of the Plan, to potential amendments to the Plan which are not to prejudice any tax ruling applicable to the Plan. As noted above, the Department does not extend approval of plans except by way of an advance income tax ruling. 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.

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.

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

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