25 February 1998 Income Tax Severed Letter 9802265 - 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.

SUMMARY: Deferred salary leave plan—ITR-6801(1)(a)—Whether a particular plan meets the requirements in Regulation 6801(1)(a) with respect to deferred salary leave plans.

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:

Whether Plan meets requirements of section 6801 of the Regulations.

POSITION:

No

REASONS:

It should be amended to include: 1. Leave of absence period (LAP) is to commence immediately after a period not exceeding six years. 2. Salary deferred amount must be limited to 1/3 of salary. 3. Income earned will be paid on December 31 of each year. 4. No salary, except deferred amount, would be paid in the LAP. 5. Deferred salary is to be paid no later than the end of the first taxation year that commences after the deferral period. 6. Participant must return to work for a minimum of one year.

980226 XXXXXXXXXX Fouad Daaboul

Attention: XXXXXXXXXX

February 25, 1998

Re: Deferred Salary Leave Plan (the "Plan")

This is in reply to your letter of January 29, 1998 with an enclosed copy of your draft Plan.

Our review of the Plan indicates that there are a number of deficiencies which should be amended to ensure that the Plan complies with the Regulations. These include:

1. For the purposes of Article 23.01(c), the Plan must provide that the leave of absence period (the "LAP") is to commence immediately after a period not exceeding six years after the date the salary deferrals commence.

2. The plan must provide that the salary deferred by the participant in a taxation year, as stipulated under Article 23.01(e), does not exceed 33 1/3 % of the participant's regular annual salary and any related benefit.

3. The Plan should provide that not only interest would be earned, as stipulated under your Article 23.01(e), but also any amount earned by the deferred amounts. Income earned on the deferred amount must be paid to the participant on December 31 of each year during the deferral period.

4. The Plan must provide that throughout the leave of absence period, the employee 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 amount by which the employee's salary under the Plan was deferred or is to be reduced and reasonable fringe benefits.

5. The Plan must provide that all amounts held under the arrangement will have to be paid to the employee no later than the end of the first taxation year that commences after the deferral period.

6. The Plan must provide that following the LAP, the Participant must return to her or his regular employment with the employer for a minimum of one year.

COMMENTS

You may wish to include some of the following comments in the Plan on Canada Pension Plan ("CPP") which reflect the Department's position.

When the deferred amounts are paid to the employee by a trustee 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 $700 and the employee contributed $500 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)952-5422 or to the following address:

CPP/EI Eligibility Division 7th Floor 400 Cumberland Street Ottawa ON K1A 0L5

If the Plan is amended as discussed above, it is our opinion that it will meet the requirements of paragraph 6801(a) of the Income Tax Regulations. You are advised that this letter is not an advance income tax ruling but is merely a statement of opinion on the specifics of your proposed Plan and it is not binding on the Department. We trust, however, that our comments will be of assistance.

For your information, we enclose the Department's publication ATR-39 which describes a deferred salary leave plan that complies with the requirements of section 6801 of the Regulations.

Yours truly,

for Director Financial Industries Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch