7 September 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: XXX Deferred Salary Leave Plan (the "Plan") Section 6801 of the Income Tax Regulations (the "Regulations")

This is in reply to your letter of July 15, 1991 with an enclosed copy of the above-mentioned Plan in which you request our comments as to whether the Plan qualifies as a deferred salary leave plan.

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. XXX In our telephone conversation XXX (Shea-DesRosiers) of September 10, 1991, you explained that no interest accrued for XXX. The Plan should indicate that interest will start to accrue on January 1, 1991.
• 2. Pursuant to subparagraph 6801(a)(iii) of the Regulations, the Plan must provide that, throughout the period of leave of absence, 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.
• 3. XXX. 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.
• 4. 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 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 to 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 that are required to be paid during the leave period are to be deducted and remitted by the trustee as by any other employer, those 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 Plan 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
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 on the Department. An advance income tax ruling could not be issued since the Plan is already in existence (deferral payments started April 1, 1990). An advance income tax ruling is only given for proposed transactions. However, provided the Plan is amended as noted above, it is our opinion that the Plan will be a prescribed plan under paragraph 6801(a) of the Regulations.

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