7 January 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.

Subject: Deferred Salary Leave Plan (the “Plan”) XXX

This is in reply to your Memorandum of November 27, 1990 with an attached copy of the Plan for the teachers of the XXX.

You have requested that we confirm that the content of the Plan complies with the provisions of section 6801 of theIncome Tax Regulations(the “ Regulations”). Our review of the provisions under the Plan indicates that there are a number of deficiencies which should be amended to ensure that the Plan complies with the Regulations.

• 1. The Plan should indicate clearly that it is not established to provide benefits to the participants on or after retirement.
• 2. Subparagraph 6801(a)(ii) of the Regulations requires that the percentage deferral in any taxation year of the employee shall not exceed 33 1/3% of the amount of salary that the employee would normally receive in that year. A taxation year for an individual is usually the calendar year. The Plan should be amended to indicate such maximum and paragraph .20 of the Plan should indicate such maximum.
• 3. The Plan must specify that the minimum leave of absence shall be for a period of six (6) months.
• 4. The Plan must provide that the participant shall return to his/her regular employment for a period at least equal to the period of leave of absence so that it complies with subparagraph 6801(a)(v) of the Regulations. The Plan may, if it is so desired, also provide that a participant may return to the employ of another employer which participates in the same or similar arrangement. The Plan should be amended accordingly.
• 5. Pursuant to subparagraph 6801(a)(i) of the Regulations, the Plan must provide that the leave of absence is to commence immediately after the deferral period and said deferral period must not exceed 6 years from the date on which deferrals are commenced. The Plan should be amended accordingly. Paragraph .20 of the Plan should provide for such restriction.
• 6. Concerning paragraph .14 of the Plan, if the employee has a right to withdraw in other circumstances (i.e., other than financial or other hardship) it may indicate that the main purpose of the Plan is to defer taxes rather than permit employees to fund a leave of absence. Said paragraph should be amended to allow withdrawals only in the circumstances mentioned above.

As for paragraph .15 of the Plan, it should be amended accordingly (i.e. right to withdraw). It should be noted that section 6801 of the Regulations is applicable to 1986 and the following years.

• 7. Pursuant to subparagraph 6801(a)(iii) of the Regulations, the Plan must provide that throughout the period of leave of absence, the employee will 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.
• 8. 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 theIncome 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. Subparagraph .06 (i) of the Plan should be amended accordingly.

Clause 6801(a)(iv)(B) of the Regulations provides that where deferred amounts are held by or for the account of any person other than a trust referred to in Clause 6801(a)(iv)(A) of the Regulations, any amount in respect of interest or other additional amounts that may reasonably be considered to have accrued to or for the benefit of the employee to the end of a taxation year must be paid in the year to the employee.

• 9. Concerning the withholding of income tax during the deferral period, deductions for income tax purposes will 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.
• 10. The Plan must provide that in the event the employee does not take his leave of absence in the designated period, the deferred amounts will be paid to the employee in the first taxation year that commence after the end of the deferral period. Paragraphs .16 and .18 of the Plan should be amended to incorporate this provision.
• 11. 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.
• 12. As far as Canada Pension Plan (“CPP”) premiums are concerned, they 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 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.

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