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.
Principal Issues: Does the plan qualify as a DSLP?
Position: Question of fact.
Reasons: If it meets the required conditions set out in Regulation 6801(a).
XXXXXXXXXX
2009-035085
Lori Merrigan
(613) 957-8979
March 15, 2011
Dear XXXXXXXXXX :
Re: XXXXXXXXXX District School Board - Deferred Salary Leave Plan
This is in response to your correspondence of November 25, 2009, inquiring as to whether changes to your Deferred Salary Leave Plan ("DSLP") meet the requirements outlined in paragraph 6801(a) of the Income Tax Regulations (the "Regulations"). We also acknowledge our telephone calls (Merrigan/XXXXXXXXXX ) of January 25, 2010, and January 29, 2010, and our fax of January 29, 2010, containing copies of our documents 9121785 and 9117365.
More specifically, you have the following concerns:
1. whether the new six-month leave arrangement meets the requirements outlined in paragraph 6801(a) of the Regulations; and
2. whether the months of July and August may be included in the six-month leave period for teachers, who are employed, but are not required to teach during those months.
The situation outlined in your letter relates to a factual one, involving a specific self-funded leave arrangement. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings". This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the CRA website at http://www.cra-arc.gc.ca. For questions involving continuing transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. Although we cannot comment on your specific situation, we are able to provide the following general comments, which may be of assistance.
A DSLP is a plan or arrangement that permits an employee to fund, through salary deferrals, a leave of absence from their employment. To qualify as a DSLP, an arrangement must satisfy the conditions set out in paragraph 6801(a) of the Regulations. Whether or not your self-funded arrangement may be considered a DSLP is a question of fact, however, some of the requirements more specific to your concerns are discussed below.
The deferral period refers to the time period between the first salary deferral and the date that the employee commences the leave of absence and starts to receive income benefits from the DSLP, which are as a result of his or her election to defer salary. Pursuant to subparagraph 6801(a)(i) of the Regulations, the deferral period cannot exceed six years.
The leave of absence is the period during which the individual is absent from employment and during which payments of the DSLP income benefits occur. Pursuant to subparagraph 6801(a)(i) of the Regulations, the period of the leave of absence must commence immediately following the deferral period.
Subparagraph 6801(a)(iii) of the Regulations requires that during the period of the leave of absence, a participant in a DSLP cannot receive any salary or wages from the employer or from any person or partnership that does not deal with the employer at arm's length. Although your DSLP prohibits an employee from receiving any salary or wages from the employer during the leave of absence, it does not make reference to any salary or wages received from any person or partnerships that does not deal with the employer at arm's length during that leave of absence.
You also enquired whether the months of July and August would be included in the minimum period of the leave of absence where the employee is a school teacher that is not teaching during these two months, but remains on contract during the summer period. It is our view that if an individual (e.g. a school teacher) is employed, however, under his or her contract of employment is not required to report to work for a period between semesters, that period may be included in the calculation of the leave of absence.
A DSLP should specify what percentage of salary or wages otherwise payable to the employee will be deferred, and for what period of time. Pursuant to subparagraph 6801(a)(ii) of the Regulations, the amount of the salary or wages deferred in any given year cannot exceed 33-1/3% of the amount of salary or wages that the employee would normally have received in the year in respect of the services.
Included in your DSLP is a table which outlines the maximum deferrals for a full-year leave arrangement and a six-month leave arrangement which appear to be over a deferral period of not more than six years. The criteria outlined in the DSLP state that deferrals may not exceed 33-1/3% annually for a full-year arrangement and 16% annually for a six-month arrangement. These conditions appear to meet the requirements listed in subparagraphs 6801(a)(i) and (ii) of the Regulations provided that the amount of the salary or wages deferred in any given year cannot exceed 33-1/3% of the amount of salary or wages that the employee would normally have received in the year in respect of the services.
We note that the terms of your DSLP provide for withdrawal from the DSLP up to March first of the year prior to the school year in which a participant's leave of absence is scheduled to commence. A DSLP cannot provide for a participant's voluntary withdrawal from the plan. Such a provision would violate paragraph 6801(a) of the Regulations because it means that the employee can, at any time, access the funds held in the DSLP for his or her benefit.
Although a provision permitting voluntary withdrawal from a DSLP is problematic, a DSLP can provide for early withdrawal in extenuating circumstances such as where continued participation therein would cause financial hardship to the employee. Generally, this withdrawal should only be available with the employer's permission. Where this occurs, and withdrawal from the DSLP takes place prior to the participant's leave of absence, all amounts previously deferred under the plan and any unpaid interest are payable and taxable in the year the employee withdraws from the plan.
We trust that these comments will be of assistance.
Yours truly,
Mary Pat Baldwin, CA
Manager
Deferred Compensation Arrangements and Retirement Plans Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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