10 January 2000 External T.I. 9928165 - DSLP

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 992816
M. P. Sarazin
Attention: XXXXXXXXXX

January 10, 2000

Dear Sir\Madam:

Re: Proposed Deferred Salary Leave Plan

This is in response to your letters of October 25 and October 29, 1999, 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 Canada Customs and Revenue Agency 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. Your policy statement mentions that the leave cannot be used for pre-retirement but the policy statement is silent with respect to a participant's withdrawal from the plan or a participant's ability to extend the deferral period under the plan. Generally, the terms of the plan should not allow a participant to withdraw from the DSLP without the permission of the employer and that this permission will only be granted under extenuating circumstances. (ATR-39, 4.2)

(c) 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. Again your policy statement does not prohibit either the extension of the deferral period or the postponement of the leave period. (ATR-39, 3.6 and 3.1) Furthermore, the policy statement states that if a participant fails to take the leave, then the deferred amounts must be reported as income in the first taxation year that begins after the end of the deferral period. We note that when any condition in paragraph 6801(a) of the Regulations ceases to be satisfied, including the condition that the deferrals be made and held for the purpose of taking a leave of absence, then the full amount deferred has to be included in the participant's income for the year in which it is known the condition will not be satisfied .

(d) The amount of salary deferred by a participant in any calendar year cannot exceed 33 and 1/3 per cent of the amount of the participant's salary or wages for that year. Salary or wages is defined in subsection 248(1) of the Income Tax Act to mean the income from an office or employment as computed under subdivision a of Division B of Part I. (ATR-39, 2.2)

(e) 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)

(f) 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. We note that there is no provision allowing for the retention of the interest to help pay for the employment benefits normally provided by the employer. (ATR-39, 2.3, 7.3)

(g) 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. We are not certain that your policy statement complies in this respect since it refers to an article 14 or 15 (not reproduced or explained anywhere) in the event a participant's position is abolished. (ATR-39, 6.1)

(h) 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 Directorate
Policy & Legislation Branch

ENCLOSURES