5 August 1999 External T.I. 9916525 - DSLP-RETAINED DEFERRALS MUST BE CONTINUOUS

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:

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.

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

xxxxxxxxxx 991652
P. -A. Sarrazin

Attention: xxxxxxxxxx

August 5, 1999

Dear Sirs:

RE: XXXXXXXXXX
Deferred Salary Leave Plan (the “Plant”)

This is in reply to your letters of June 11 and July 15, 1999, together with a copy of your draft Plan and the latest amendments to the 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 paragraph 6801(a) of the Income Tax Regulations (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 706R3, 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, including Schedules A and B which form part 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 Regulations. These include:

The term "deferred salary" is defined under clause XXXXXXXXXX of the Plan. As it now reads, it currently includes the interest earned on the portion of the gross annual salary, which is deferred under the Plan. We understand that you are trying to define a term that will group together these two amounts for ease of reference. However, this definition is misleading when reconciled with paragraph 6801(a)'s concept that interest payments must not be deferred, but must be paid each year to the participant. We suggest that you define interest payments as "accrued interest" (as this term appears in XXXXXXXXXX of Schedule A) separately and use both "deferred salary" and "accrued interest" when the context requires it.

Clauses XXXXXXXXXX discuss CPP and El withholdings. 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 to 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.

Clause XXXXXXXXXX relates to the payment of accrued interest to participants. While the payment can be net of the administration costs, the full amount of interest income becomes taxable in the hands of the participant. Therefore, the last sentence in clause XXXXXXXXXX should be reworded to read: "The full amount of interest income is taxable in the year it is earned, as income from employment, and appropriate income tax information slips will be issued as required."

Clause XXXXXXXXXX mentions that the leave period will count as continuous service for the purposes of vacation accrual rate. For greater certainty, and to satisfy one of paragraph 6801(a) '5 requirements, the Plan should also expressly provide in section XXXXXXXXXX that the amounts to be paid to a participant during leave shall exclusively be related to the moneys retained by the employer and any reasonable fringe benefits excluding vacation.

Clause XXXXXXXXXX deals with withdrawal issues and provides for the payment of the deferred salary and accrued interest to the participant. For greater certainty, it should be made clear that the payment shall be equal to the deferred compensation amount less applicable withholdings. Clause XXXXXXXXXX also mentions "deferred salary amount as provided in clause XXXXXXXXXX "; we believe it should say "deferred salary amount as defined in clause XXXXXXXXXX ". Reference is made, under clause XXXXXXXXXX of the Plan, to it being subject to the Income Tax Act. 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.

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.

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

Yours truly,

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