4 July 1995 External T.I. 9511065 - DSLP

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

DSLP

Position TAKEN:

Routine review of PLan

Reasons FOR POSITION TAKEN:

XXXXXXXXXX M.P. Baldwin

Attention: XXXXXXXXXX

July 4, 1995

Dear Sirs:

Re: Deferred Compensation Leave Plan

This is in reply to your letter of April 11, 1995 in which you request we review and advise you if your Deferred Compensation Leave Plan (the "Plan") meets all the requirements of paragraph 6801(a) of the Income Tax Regulations (the "Regulations").

A salary deferral arrangement does not have to be approved by the Department for it to comply with the provisions of paragraph 6801(a) of the Regulations. However, a confirmation that your Plan does meet these provisions can be obtained in the form of an advance income tax ruling if you so desire and a request for it is submitted in the manner set out in Information Circular 70-6R2 (a copy of which is enclosed).

Our review of the provisions under the Plan indicates that there are some deficiencies which should be amended to ensure that the Plan complies with the Regulations.

1.The Plan should clearly indicate that it is not established to provide benefits to participants on or after retirement.

2.The Plan provides for the "employee may withdraw, in writing, from the Plan any time up to six months prior to the leave, provided that the employee has applied to his/her manager for withdrawal and the reasons have been accepted". A voluntary withdrawal provision of this nature may indicate that the main purpose of the Plan is not to permit the employee to fund a leave of absence but rather to defer income taxes. The Plan should be amended to provide an employee with the right to withdrawal from the Plan only in the case of financial or other hardship.

3.Subparagraph 6801(a)(i) of the Regulations provides that a leave of absence must commence immediately after the deferral period and that the deferral period must not exceed 6 years from the date on which the deferrals are commenced. In our view, the Plan should clearly provide that, under no circumstances will a deferral period in excess of 6 years be allowed. Accordingly, paragraph 4, paragraph 9 and paragraph 13 of the Plan should be amended to state that if the deferral period is delayed, extended or that vacation or booked time is added to the leave period that the deferral period will not extend beyond 6 years from the date on which the deferrals were commenced.

4.Pursuant to subparagraph 6801(a)(iv) of the Regulations, the Plan must provide that any interest or additional amounts (capital gains) 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 the Income Tax Act. As such, the Plan should be amended to state that the interest will be paid to the employee.

5.Pursuant to subparagraph 6801(a)(v) of the Regulations, the Plan must include a term or condition that the employee return to his/her regular employment after the leave of absence for a period that is not less than the period of the leave of absence and may, if it is so desired, also provide for an employee to return to the employ of another employer which participates in the same or similar arrangement. As such, paragraph 3 of the Plan should be amended accordingly.

6.Pursuant to subparagraph 6801(1)(a)(vi) of the Regulations the Plan must provide that all amounts will be paid out of the Plan no later than the first taxation year that commences after the end of the deferral period. Accordingly, the Plan should be amended to provide for this.

7.Paragraph 8 of the Plan should be amended to provide that, throughout the period of the leave of absence, the employee does 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.

Comments

It is the Department's position that 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 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 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)952-8179 or to the following address:

Coverage Policy and Legislation Section
Source Deduction Division
Revenue Canada Taxation
875 Heron Road
Ottawa, Ontario
K1A 0L8

It is also the Department's position that UI premiums are to be based on the participant's gross salary before deferrals during the period of deferral and no premiums are to be withheld from the deferred amounts when paid to the participant during the leave period.

For your information, we have enclosed a copy of the Income Tax Ruling ATR-39 which deals with Deferred Salary Leave Plans.

This letter is not an advance income tax ruling but is a statement of opinion on the specifics of the Plan and it is not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch