23 July 1999 External T.I. 9916665 - DSLP, 6801(A) CONDITIONS

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 their policy for a proposed deferred salary leave plan satisfy the conditions described in paragraph 6801(a) of the Regulations?

Position: No.

Reasons: The policy does not cover all of the conditions that have to be satisfied before a plan or arrangement will be exempted from the SDA rules under paragraph 6801(a) of the Regulations.

XXXXXXXXXX 991666
M. P. Sarazin
Attention: XXXXXXXXXX

July 23, 1999

Dear Sirs:

Re: Proposed Deferred Salary Leave Plan

This is in reply to your letter dated February 16, 1999, addressed to the Winnipeg Taxation Centre, wherein you requested our comments in respect of your proposed deferred salary leave plan.

A salary deferral arrangement does not have to be approved by the Department for it to comply with the provisions of paragraph 6801(a) of the Income Tax Regulations (the "Regulations"). However, a confirmation that your proposed deferred salary leave plan ("DSLP") does meet these provisions can be obtained in the form of an advance income tax ruling, if you so desire, and a request for it is submitted in the manner set out in Information Circular 70-6R3, a copy of which is enclosed.

Your letter included a general policy statement in respect of a proposed deferred salary plan but it did not include a copy of any plan documents associated with the DSLP. Consequently, we can only comment on the deficiencies that exist in the general policy statement itself. In drafting the terms and conditions of your DSLP, we suggest that you consider our comments and that you refer to the enclosed copy of Income Tax Ruling ATR-39 (references to sample wording in ATR-39 follow each comment if available).

(a) Each employee's plan or arrangement has to be in writing. This will ensure that the employer and the participant's rights under the plan or arrangement are clearly spelled out.

(b) Based on the terms of the DSLP, it must be reasonable to conclude that the arrangement is not established to provide benefits to the employee on or after retirement but is established for the main purpose of permitting the employee to fund a leave of absence. Generally, the terms of the plan should not allow a participant to withdraw from the DSLP without the permission of the employer and this permission will only be granted under extenuating circumstances. (ATR-39, 4.2)

(c) The period of leave under the DSLP may not be less than three months in the case where the participant will attend, on a full-time basis, a designated educational institution, and 6 months in any other case. (ATR-39, 1 "Leave of Absence")

(d) The period of leave must commence immediately after a deferral period. The deferral period cannot exceed 6 years after the date on which the salary deferrals commence. (ATR-39, 3.6 and 3.1)

(e) The amount of salary deferred by a participant in any year cannot exceed 33 and 1/3 per cent of the amount of the participant's salary or wages for that year. (ATR-39, 2.2)

(f) The DSLP must provide that the participant will not receive any salary or wages from the employer (or a person who does not deal at arm's length with the employer) during the period of leave other than the deferred amounts and reasonable fringe benefits that the employer usually pays on behalf of its employees. (ATR-39, 3.3, 3.9, 3.10, 3.11)

(g) The income earned on the deferred amount retained in respect of each participant in the DSLP in a taxation year has to be paid to the participant in that taxation year. The amount has to be paid and reported as employment income to the participant. (ATR-39, 2.3, 7.3)

(h) The DSLP must provide that the participant is to return to his or her regular employment with the employer or an employer that participates in the same or similar arrangement after the period of leave for a period that is not less than the period of the leave of absence. (ATR-39, 6.1)

(i) The DSLP must provide that all amounts held for the participant's benefit under the arrangement must be paid to the participant no later than the end of the first taxation year that commences after the end of the deferral period. (ATR- 39, 3.2)

We note that all of these conditions have to be satisfied within the terms of the DSLP before the plan or arrangement will qualify as a deferred salary leave plan for the purposes of paragraph 6801(a) of the Regulations.

We trust the above comments will be of assistance.

Yours truly,

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

ENCLOSURES

- 3 -