13 December 1991 External T.I. 9124895 F - 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.

5-912489

Dear Madam:

Re:  Deferred Salary Leave Plan for Employees of 24(1)(the "Board")                 

We are writing in reply to your letter of September 3, 1991, in which you ask us to approve the Board's Policy (a copy of which was enclosed with your letter) for the above-noted deferred salary leave plan.

We reviewed the Policy and have the following comments:

1.            Under "Guidelines" on page one of the Policy, the last sentence should be amended to add the statement that the leave cannot be less than six consecutive months.  (Note that a leave can be for a minimum period of three consecutive months if the only purpose of the leave is to attend full-time at a "designated educational institution" (as defined in subsection 118.6(1) of the Income Tax Act).)

2.            The "Deferred Salary Formula" described on page three of the Policy does not comply with Regulation 6801 of the Income Tax Act (the "Act").  That Regulation requires that interest income earned on the deferred amounts to the end of each taxation year must be paid in the year to the employee.  The Department considers such interest amounts to be employment income and they must, therefore, be reported on the T4 supplementary.

        Regulation 6801 also requires that no more than 33 1/3% of the employee's annual salary or wages be deferred each year and that an employee may defer for no longer than six years after the date the deferrals commence.

3.            The deferred amounts must be paid to the employee by no later than the end of the first taxation year that commences after the year  in which deferral ends.  Paragraphs 5 (page four of the Policy), and 8 B. D. and E. (pages five and six of the Policy) should therefore be amended to ensure that any payment of the deferred amounts be made within this time frame.

        Paragraph 8 D. should be further amended so that it is clear that the lump sum adjustment is paid in the event that the teacher withdraws from the Plan under any of items 8 A. B. or C.

4.            The Policy should be amended to state that (a) the leave of absence is to commence six years after the date the salary deferrals commence;

         (b) during the leave of absence the employee will not receive any salary or wages from the Board, or from any other person or partnership with whom the Board does not deal at arm's length, except for the deferred amounts and reasonable fringe benefits the Board usually pays to or on behalf of employees;

        (c) the employee will return to his regular employment with the Board (or with an employer that participates in the same or a similar arrangement) after the leave of absence for a period that is not less than the period of leave of absence.

Enclosed is 39 on the subject of deferred salary leave plans which discusses some of the terms and conditions of a deferred salary leave plan which meets the requirements of the Income Tax Act.  There are also some general comments on the Canada Pension Plan and Unemployment Insurance Act provisions as they apply to such plans.

A further review of your Policy by the Department should not be necessary if it is revised in accordance with the foregoing comments.  If you require any further assistance, however, please do not hesitate to contact us.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate