25 October 1989 Income Tax Severed Letter AC58723 - Self-funded 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.

Atomic Energy Control Board P.O. Box 1046 Ottawa, Ontario

K1P 5S9                                   5-8723
                                          D.S. Delorey           

                                          (613) 957-3495

  Attention:  R.W. Blackburn, Director
              Planning & Administration Branch
October 25, 1989
Dear Sirs:

Re: Proposed Policy on Self-Funded Leave (the "Plan")

This is in reply to your letter of September 21, 1989.

You enclosed with your letter a copy of the Plan, together with a copy of the proposed Application form to be signed by a participant, and ask us to confirm that the Plan "meets the taxation guidelines". By "taxation guidelines", we presume you refer to the provisions of paragraph 6801(a) of the Income Tax Regulations (the "Regulations") that govern deferred salary leave plans. We do not provide such confirmations other than in reply to an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R. We nevertheless offer the following general comments.

Our review of the submitted material indicates that the Plan, in general, complies with the provisions of paragraph 6801(a) of the Regulations. We did note, however, the following concerns that you should address in order to ensure that it complies therewith.

1.         The Plan must provide that the leave of absence shall
         be for a period of not less than 6 consecutive months.
         We suggest that the first paragraph under the caption
         "Definition" be revised to clearly cover this
         requirement.

2.         The Plan must provide that a participant is to return
         to his regular employment for a period at least equal to
         the period of absence.  In this regard, we suggest you
         delete the word "expected" in line one of the third
         paragraph under the caption "Definition".

3.         The Plan must provide that all amounts held for a
         participant are to be paid to the participant by
         December 31 of the year that commences after the end of
         the deferral period. In. this regard, we have the   
         following comments:

    (a)  We suggest that this requirement be clearly set out in
         the Plan, perhaps as an added paragraph under the
         caption "Financial Arrangements".

    (b)  We note in the fourth paragraph under the caption 
         "Withdrawal and Deferrals" the comment "funds shall be
         released ... on the date specified and determined by the
         executors or administrators of the estate".  It should
         be stated that this date will be no later than December
         31 of the year that commences after the end of the
         deferral period.

4.       The Plan must be established for the main purpose of
         permitting the participant to fund a leave of absence,
         not to provide benefits to the participant on or after
         retirement.  In this regard, we have the following
         comments:

    (a)  The first paragraph under the caption "Withdrawals and 
         Deferrals" provides that a participant may withdraw from
         the Plan no later than six months prior to the planned
         leave date by giving a written notice to his manager and
         the Compensation Services Unit.  A voluntary withdrawal
         provision of this nature may indicate that the main
         purpose of the Plan is not to permit the participant    
         to fund a leave of absence but rather to defer income
         taxes.  We suggest that the Plan be amended to provide a
         participant with the right to withdraw funds only in the
         case of financial or other hardship, or upon termination
         of employment.

    (b)  While number 3 of the proposed Application form reflects
         an awareness of the above-mentioned purpose test, we
         suggest for greater certainty that a reference to this
         test be made in the Plan itself, perhaps as part of the
         approval procedure discussed under the caption
         "Procedure For Application".

5.         The Plan must provide that the leave of absence is to
         commence immediately after the deferral period and the
         deferral period cannot exceed six years.  While
         indications are that this requirement is met under the
         Plan, we suggest for greater certainty that a reference
         to this requirement be made in the postponement options
         set out in the third and fourth last paragraphs under
         the caption "Withdrawals and Deferrals". Should any
         postponement cause the leave of absence to commence at  
         a later date, the provision discussed in 3 above will
         apply and all amounts held under the Plan will have to
         be paid to the participant no later than December 31 of
         the year that commences after the end of the deferral
         period.

6.         The Plan must provide that interest or other amounts
         earned in a calendar year on a participant's deferred
         amounts must be paid to the participant by December 31
         of that year.  Such interest will represent employment
         income to the participant.  While number 11 of the
         proposed Application form indicates that this
         requirement will be met, we find the third paragraph
         under the caption "Tax Considerations" to be confusing
         in this regard and we suggest it be reworded to clearly
         reflect this requirement.

7.         The Plan must provide that throughout the period of
         leave of absence the participant 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 deferred amounts and reasonable fringe
         benefits.  We suggest that the first paragraph under the
         caption "Definition" be reworded to clearly reflect this
         requirement.

8.         In line three of the last paragraph under the caption
         "Tax Considerations", we suggest that "employment" be
         inserted before "income".

The above comments reflect expressions of opinion only and, as indicated in Information Circular 70-6R, they are not binding on the Department. We trust however that they will be of assistance to you.

Yours truly,

for Director Financial Industries Division Rulings Directorate