7 June 1991 Income Tax Severed Letter - 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.

Dear Sirs:

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

This is in reply to your letter of April 26, 1991, requesting an advance income tax ruling in respect of the above-noted Plan and further to our telephone conversation XXX (Shea-DesRosiers) of May 8, 1991, wherein you advised us an opinion and not a ruling on the Plan would be sufficient.

As noted in Information Circular 70-6R, we do not express opinions on specific proposed transactions other than as a reply to an advance income tax ruling request. As a consequence thereof, we may only offer the following general comments.

Our review of the submitted Plan indicates that, in general, it complies with the provisions of paragraph 6801(a) of the Regulations. However, we did note the following concerns which should be addressed in order to ensure that it complies therewith.

• 1. The Plan should indicate that it is not established to provide benefits to the participants on or after retirement.
• 2. Concerning the withholding of income tax during the deferral period, deductions for income tax purposes must be based on the monies the participating employee actually receives. While on leave, the deferred salary will also be subject to income tax deductions on the amount received by the employee.
• 3. Pursuant to subparagraph 6801(a)(vi) of the Regulations, the Plan must provide that in the event the employee does not take his/her leave of absence in the designated period, the deferred amounts will be paid to the employee in the first taxation year that commences after the end of the deferral period. Paragraph 4.9 of the Plan should be amended accordingly.
• 4. Please note that clause 6801(a)(i)(A) of the Regulations allows a reduced leave of absence period when an employee is in full-time attendance at a designated educational institution as defined in subsection 118.6(1) of the Income Tax Act (the "Act"). The regulation does not require Revenue Canada's approval in order for it to apply and, at this time, who do not anticipate the provision of such approvals on an on-going basis. The onus to substantiate compliance with the provision must rest with the employer and employee.

A designated educational institution is defined in subsection 118.6(1) as:

(a) an educational institution in Canada that is
• (i) A university, college or other educational institution designated by the Lieutenant Governor in Council of a province as a specified educational institution under the Canada Student Loans Act or recognized by the Minister of Education of the Province of Quebec for the purposes of the Student Loans and Scholarships Act of the province of Quebec, or
• (ii) certified by the Minister of Employment and Immigration to be an educational institution providing courses, other than courses designed for university credit, that furnish a person with skills for, or improve a person's skills in, an occupation.
• (b) a university outside Canada at which the individual referred to in subsection (2) was enroled in a course, of not less than 13 consecutive weeks duration, leading to a degree, or
(c) if the individual referred to in subsection (2) resided, throughout the year referred to therein, in Canada near the boundary between Canada and the United States, an educational institution in the United States to which he commuted that is a university, college or other educational institution providing courses at a post-secondary school level.
• 5. Pursuant to subparagraph 6801(a)(iv) of the Regulations, the Plan must provide that any interest or additional amounts that may reasonably be considered to have accrued for the benefit of the employee in a year must be paid in that year to the employee. 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 tax withholdings and remittances must be made.

Paragraph 8.1 of the Plan should be amended accordingly.

• 6. It is the Department's position that Unemployment Insurance Premiums are to be based on the employee's gross salary during the period of deferral and no premiums are to be withheld from the deferred amounts when paid to the employee during the leave period.
• 7. 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 amount 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 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 $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) 952-8179 or to the following address:

Coverage Policy and Legislation Section
Source Deductions Division
Revenue Canada Taxation
875 Heron Road
Ottawa, Ontario
K1A 0L8

Please be 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 upon the Department.

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 in the manner outlined in Information Circular 70-6R2, a copy of which is attached for your convenience. It is to be noted that there are no requirements to register such plans or employees in such plans with the Department.

Other

XXX. For additional information on bursaries, we refer you to Interpretation Bulletin IT-75R2 and item No. 4 of the Special Release thereto (copies enclosed).

We trust that our comments will be of assistance to you.