19 September 1991 External T.I. 9119725 F - Deferred Salary 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.

19(1)

Dear Sirs:

Re  24(1) Deferred Salary Leave Plan (the Plan) Section 6801 of the Income Tax Regulations (the "Regulations")

This is in reply to your letter of July 3,1991, with an enclosed copy of the above-mentioned Plan in which you request we advise you of the procedure to follow to obtain the Department's approval of your Plan.

A deferred salary leave plan does not have to be approved by the Department in order for it to comply with the provisions of section 6801 of the Regulations.  A confirmation that this Plan meets the provisions of section 6801 of the Regulations can only be obtained in reply to an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R2, a copy of which is enclosed for your information.

Our review of the Plan submitted indicates that the following changes should be made in order to fully comply with the requirements of paragraph 6801(a) of the Regulations.

1.     The Plan should indicate that it is not established to provide benefits to the employees on or after retirement.

2.     24(1)

For greater certainty, the Plan might indicate that these amounts are to be treated as employment income for the purposes of the Income Tax Act.  In consequence, the amounts, when received must be included on the employee's T4 supplementary and the usual withholdings and remittances must be made by the employer.

3.     Clause 6.2 of the Plan provides for the withdrawal from the Plan.  We suggest that, to be more precise, said clause state

...reasonable circumstances such as financial or other hardship for the withdrawal request".

24(1)4. To comply with subparagraph 6801(a)(vi) of the Regulations, the Plan must also provide that all amounts will be paid out of the Plan no later than the end of the first taxation year that commences after the end of the deferral period.

5.     Clause 4.4.4 of the Plan should not only refer to the employer but also to any person with whom the employer does not deal at arm's length.  Said clause should be amended accordingly.

6.     The Plan, in a number of provisions, makes a reference to the school year.  Such references may be appropriate for the administration of the Plan and may, for tax purposes in general, not result in any adverse tax consequences or cause non-compliance with the provisions of section 6801 of the Regulations. However caution should be exercised in this regard.

24(1) Subparagraph 6801(a)(i) of the Regulations, however, required that the percentage deferral in any taxation year of the Participant must not exceed 33 l/3% of the amount of salary that the   24(1) would normally receive in that year.  A taxation year for an individual is usually the calendar year.  In our view, the provision should be revised to ensure that the maximum percentage deferral allowed will also be limited on a calendar year basis as provided in said subparagraph of the Regulations.

Comments

The following comments with respect to Canada Pension Plan are for clarification purposes only.

It is the Department's position that Canada Pension Plan ("CPP") premiums are to be based on the employee's salary net of the deferred amounts during the period of deferral and on the deferred amounts when paid to the employee during the leave period.  When the deferred amounts are paid to the employee by a trusted of the Plan during the leave period, that trustee is deemed by the CPP Act to be an employer of the employee and is therefore required to pay the employer's CPP contribution in respect of that employee.  Where the trustee/employer recovers the employer's CPP contribution from amounts otherwise payable to the employee, it is our view that this recovered amount will not be part of the employee's gross salary from that trustee/employer and therefore need not be included on the employee's T4 slip. Although the trustee is deemed under the CPP Act to be an employer, the employee does not enter into new employment with the trustee when he goes on leave.  Consequently, while CPP contributions that are required to be paid during the leave period are to be deducted and remitted by the trustee as by any other employer, CPP contributions paid in the year prior to the leave period must be taken into consideration by the trustee.  For example, if the required CPP contributions for a year by an employee were $600 and the employee contributed $400 before going on leave, the trustee would be required to deduct and remit CPP contributions for that year of $200 on behalf of the employee, plus the employer's portion.

The trustee will be required to prepare T4s reflecting the amount paid by the trustee to the employees under the Plans and, among other things, the CPP contributions.  However, since CPP contributions made during the year prior to the leave period are to be taken into consideration by the trustee, the amount of contributory earnings reported by the trustee may not coincide with the earnings reported in box "C" for that particular year. If such is the case, the amount of contributory earnings must be recorded in box "I" of the T4 which should in turn coincide with the amount of contributions reported in box "D".  There may also be instances where the trustee will not have made any deductions for CPP because the employee reached the maximum contributions prior to the leave period.  If such is the case, a check mark should be indicated in box "J" Of the T4 under CPP.

If further information is required concerning the trustee's responsibility with respect to CPP contributions or the preparation of T4s etc., the enquiry should be directed to Mr. Pierre M. Paquette at (613)952-5433 or to the following address:

Coverage Policy and Legislation Section Source Deductions Division Revenue Canada Taxation 875 Heron Road Ottawa, Ontario KLA OL8

While in our view an advance income tax ruling should not be necessary if the Plan is amended as discussed above, should you desire one, we will be pleased to again review your Plan upon its amendment and issue a ruling thereon provided your request is made pursuant to the procedures outlined in Information Circular 70-6R2.

We trust the above comments will be of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate