7 April 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: Deferred Salary Leave Plan ("DSLP")

This is in reply to your letter of March 6, 1991 concerning a self- funded leave plan which was in force prior to July 28, 1986 and is still in existence today.

For your Plan to be considered a Deferred Salary Leave Plan as described in paragraph 6801(b) of the Income Tax Regulations (the "Regulations"), it has to have been established between an employer and an individual employee before July 28, 1986, the contributions must have started before 1987 and it must not have been established to provide benefits on or after retirement but for the main purpose of permitting the employee to fund a leave of absence from employment.

The Plan could have become a retirement compensation arrangement ("RCA") as defined in subsection 248(1) of the Income Tax Act (the "Act"). The new provisions concerning an RCA are discussed at length in the Department's RCA guide. In brief, if employees entered into the Plan before July 28, 1986, and the Plan has not since been materially altered, the law provides that the employees are now members of two plans, an "existing arrangement" which must be treated as an Employee Benefit Plan ("EBP") and a "statutory arrangement" which must be treated as an RCA.

The EBP segment includes all of the contributions made for the years prior to July 28, 1986 through 1987 together with any property derived from those contributions. Employees cannot make any further contributions to this segment and the contributions made since December 31, 1987 do not form a part of it. Otherwise this segment can generally carry on as it was authorized to do in the past. An employee will be taxable on amounts received out of the EBP but can defer payment through the use of a plan's payout options, at retirement, termination of employment or upon death. To this effect, a plan can provide that payments will be made in equal amounts over a number of years or that an annuity will be purchased for a term certain or based on the employee's life. To the extent of available funding, this segment may also be used to fund leaves of absence in accordance with the terms of the plan.

The RCA segment of the plan must include all contributions which have been made since December 31, 1987 together with any property derived from them. The employer and the trustee of the plan have, since that time, been under an obligation to withhold and/or remit, as a special refundable tax, 50% of all contributions and trust income. Amounts paid out of the RCA segment will be taxable on receipt but the RCA can acquire annuities to fund payments over an extended period.

To obtain a definite answer to your queries, we suggest you submit the Plan to the relevant District Office for their consideration.

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