18 December 1991 External T.I. 9130095 F - Deferred Salary Leave Plan — Arm's Length

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.

5-913009

Attention:  L. Menard

Dear Sirs:

Deferred Salary Leave Plans (DSLP) Re:  Regulation 6801(1)               

This is in reply to your letters of October 29 and November 18, 1991 requesting our clarification of certain of the provisions which govern DSLPs.

1.       Arms Length Relationships.

Whether or not two or more persons or other entities are at arms length with each other is a question of fact which may only be determined from a review of those facts in the light of the criteria generally considered in making such an ascertainment including the degree of control of the entities in question by a third party.  In our opinion, The Bank of Canada is not at arms length with any Federal department, agency or Crown Corporation as all of these organizations are ultimatly controlled by the Government of Canada particularly through the provisions of the Financial Administration Act,R.S.,c.F-11.

2.       Return to work provisions of Regulation 6801(a)(v).

Regulation 6801(a)(i) states, in part, that for a plan to be exempted from the salary deferral rules:

    "it must be reasonable to conclude, having regard to all the circumstances including the terms and conditions of the arrangement and any agreement relating thereto, that the arrangement is not established to provide benefits to the employee on or after retirement but is established for the main purpose of permitting the employee to fund, through salary or wage deferrals, a leave of absence..."

We would suggest that subparagraph 6801(a)(v) of the Regulation was incorporated into the provision to ensure that this purpose test is met since its existence in a particular plan will usually and reasonably lead one to the conclusion that the plan is not being used to fund an employee's retirement but is being used to fund a leave of absence.  We must, however, caution that if the provision is included in a contract but it is reasonable to assume, at the time of the overall arrangement's creation, that the parties to the contract do not intend to abide by the provision then the arrangement would not be a prescribed plan.

3.       Waiver of 6801(v) by the employer.

As noted above, the waiving of this provision can not occur at the inception of a plan or arrangement without placing the plan offside and the plan can not otherwise be used to allow employees to "ease into retirement" as you have suggested.  However, Revenue Canada will not generally object to an employer waiving this provision at a later date if the circumstances warrant such an action at that time.

Nevertheless, in such cases the remaining provisions of the Regulation would have to be applied as required in the circumstances.  In particular, if either the leave period or the deferral period is eliminated or reduced in length, care would have to be taken to ensure that all funds held under the arrangement are paid to a former employee no later than the end of the first taxation year that commences after the end of the deferral period.

4.       Returning to work for a longer period.

Regulation 6801(a)(v) requires that the arrangement must provide for an employee's return to work for a period that is "not less than the period of the leave of absence". Accordingly, the plan could provide for a return to work for a longer period if it is desired.

We trust these comments are satisfactory to your needs.

Yours truly,

for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch