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 a proposed deferred salary leave plan satisfy the requirements of Reg. 6801?
Position: Yes, if suggested amendments are adopted.
Reasons: Requirements of Reg. 6801 will be met.
XXXXXXXXXX 2000-006067
G. Kauppinen
March 6, 2001
Dear Sirs:
Re: Deferred Salary Leave Plan ("DSLP")
This is in reply to your facsimile transmission dated December 7, 2000 wherein you requested our comments regarding your draft DSLP (the "Plan") and the requirements of paragraph 6801(a) of the Income Tax Regulations ("Regulations").
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 that these are only statements of opinion on the specifics of your proposed Plan and as such are not binding on the Canada Customs and Revenue Agency. Enclosed is a copy of ATR-39 (Deferred Salary Leave Plan) which describes a plan which complies with the requirements of the Regulations. Where applicable, we will cite examples of acceptable wording in ATR-39 in our comments below.
Application for Participation
The length of the leave of absence cannot be less than six consecutive months. It would appear that the leave of absence contemplated by the Plan is for twelve consecutive months but we could not see in the Plan where this is actually stated (except in the preamble to the tables) (ATR-39 under "Definitions" - "Leave of Absence").
Leave of Absence
The Leave of Absence must commence immediately following the Deferral Period. Note that the Deferral Period includes any period of time that the Leave of Absence is postponed (either by the employer or at the request of the employee) (ATR-39 under "Definitions" - "Deferral Period"). Also, any vacation taken prior to the Leave of Absence is counted as part of the Deferral Period.
Employment During Leave
While on leave the employee is still "employed" by the College. The Regulations only require that during the leave the employee does not receive any salary or wages from the employer, or from any other person or partnership with whom the employer does not deal at arm's length other than the deferred amount and reasonable fringe benefits that the employer usually pays to or on behalf of employees.
Deferral of or Failure to Take a Leave of Absence
The last sentence under this heading is incorrect. The Regulations require that all amounts (excluding income earned on deferred salary which must be paid out at the end of each calendar year) must be paid out no later than the end of the first taxation year that commences after the end of the deferral period. This assumes that the participant is still in compliance with the other relevant Regulations, one of which states that a leave of absence must be taken. If the leave of absence is not taken, at the time that this requirement of the Regulations is not complied with the employee will be considered to have ceased participation in the Plan and all amounts held for the employee's benefit will be required to be included in computing the employee's income for tax purposes immediately at that time.
Failure to Return to Service Commitment
This paragraph should be revised to replace "shall" with "may". To explain, if the employee commenced deferrals but from the inception of participation in the Plan never intended to return to employment, the plan would fail to comply with the Regulations and the employee would be liable for taxes, interest and perhaps penalties on the amounts deferred for the year(s) the amounts were deferred. However, if the employee always intended to comply with the condition that the employee return to employment but through circumstances beyond his or her control was unable to do so, there would be no liability for taxes on the deferred amounts until the year it was known that the return to employment was impossible.
Voluntary Withdrawal
This paragraph does not comply with the Regulations. If the Plan provides for voluntary withdrawal, we consider that the Plan does not meet the requirements of subparagraph 6801(a) of the Regulations because the employee can, at any time, access the funds held in the Plan for his or her benefit. However, the Plan can provide for early withdrawal in circumstances where continued participation therein would cause financial hardship to the employee. (ATR-39 - 4.2.)
We trust the foregoing comments are of assistance.
Yours truly,
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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