Principal Issues: [TaxInterpretations translation] Do the transitional rules applicable to salary deferral arrangements apply in a particular situation?
Position: No
Reasons: The transitional rules do not apply for services rendered after June 1986 because there is no indication that the taxpayer has an obligation to defer receipt of a deferred amount under an agreement in writing made before February 26, 1986 and that it cannot cancel or otherwise avoid this obligation.
XXXXXXXXXX 2008-028934 Michel Lambert CA, M.Fisc. January 6, 2009
Dear Madam,
Subject: Deferred compensation plan
This is further to your letter of August 5, 2008 asking us to confirm that the transitional rules set out in the 1986 Budget regarding salary deferral arrangements apply to the deferred compensation plan you submitted and which was established in XXXXXXXXXX. You submitted that the Plan is an employee benefit plan.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
As stated in paragraph 22 of Information Circular 70-6R5 Advance Income Tax Rulings of May 17, 2002, it is our practice not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Salary Deferral Arrangement
First, it must be established whether the plan is a salary deferral arrangement. In short, subsection 248(1) defines a salary deferral arrangement as a plan or arrangement under which any person has a right in a taxation year to receive an amount after the year where it is reasonable to consider that one of the main purposes for the creation or existence of the right is to postpone tax payable under the Act by the taxpayer in respect of an amount that is, or is on account or in lieu of, salary or wages of the taxpayer for services rendered by the taxpayer in the year or a preceding taxation year.
The transitional rule reads in part as follows:
The definition "salary deferral arrangement" is applicable after February 26, 1986 to a prescribed plan or arrangement otherwise than with respect to an amount that would be a deferred amount but for this exception under an agreement in writing made before February 26, 1986 by a taxpayer and his employer or former employer where the amount is in respect of
(a) services rendered by the taxpayer before July 1986; or
(b) services rendered by the taxpayer after June 1986, where the taxpayer is obliged to defer the receipt of the amount and cannot cancel or otherwise avoid that obligation.
You have submitted XXXXXXXXXX employment contracts that were signed in XXXXXXXXXX. Since these agreements were not signed before February 26, 1986, we are of the view that the transitional rule will not apply to amounts deferred under those contracts. In addition, there is no evidence that the taxpayer had an obligation to defer receipt of an amount and could not cancel or otherwise avoid that obligation. We take the contrary view.
Consequently, it is our view that the Plan is a salary deferral arrangement for the amounts covered by those XXXXXXXXXX contracts.
Your request also refers to an agreement that was signed in XXXXXXXXXX. Since we do not have this agreement, we are unable to comment on it. However, any amount deferred under an employment contract signed after February 25, 1986 is, in our view, subject to the rules on salary deferral arrangements.
Tax Treatment
The value of the benefit deemed received by a taxpayer by virtue of subsection 6(11) under a salary deferral arrangement must be added to income pursuant to paragraph 6(1)(a). Subsection 6(11) clarifies the taxation of amounts deferred under such an agreement. The subsection reads as follows:
Where at the end of a taxation year any person has a right under a salary deferral arrangement in respect of a taxpayer to receive a deferred amount, an amount equal to the deferred amount shall be deemed, for the purposes only of paragraph 6(1)(a), to have been received by the taxpayer as a benefit in the year, to the extent that the amount was not otherwise included in computing the taxpayer’s income for the year or any preceding taxation year.
If, at the end of a particular taxation year (e.g., 2008), a deferred amount has not been taxable in 2008 or in a previous taxation year, we are of the view that the deferred amount is deemed to be received in that year under subsection 6(11).
Interest and other income relating to the agreement will be taxable pursuant to subsection 6(12). That subsection provides:
Where at the end of a taxation year any person has a right under a salary deferral arrangement (other than a trust governed by a salary deferral arrangement) in respect of a taxpayer to receive a deferred amount, an amount equal to any interest or other additional amount that accrued to, or for the benefit of, that person to the end of the year in respect of the deferred amount shall be deemed at the end of the year, for the purposes only of subsection 6(11), to be a deferred amount that the person has a right to receive under the arrangement.
Subsection 6(12) does not apply if the agreement is governed by a trust. We do not have the information necessary to determine whether the agreement is governed by a trust.
Depending on the circumstances, paragraph 6(1)(i) could also apply in respect of amounts that a taxpayer receives in a year under a salary deferral arrangement. Essentially, this paragraph renders taxable amounts received that have not been previously taxed under paragraph 6(1)(a) and subsections 6(11) and 6(12).
Employee Benefit Plan
You are of the opinion that the plan in place constitutes an employee benefit plan.
An employee benefit plan (EBP) is defined in subsection 248(1). The definition specifies that certain plans or arrangements are not employee benefit plans, such as a salary deferral arrangement, in respect of a taxpayer, under which deferred amounts are required to be included as benefits under paragraph 6(1)(a) in computing the taxpayer’s income.
Based on our previous findings, in our view, the agreements that you have submitted to us do not have the effect of engaging the tax rules applicable to employee benefit plans.
Voluntary Disclosure
The Voluntary Disclosures Program allows taxpayers to correct any incomplete or erroneous information or to provide information they have not previously reported to the Agency, without being subject to penalties or prosecution.
A valid disclosure must meet four conditions: it must be voluntary, complete, involve the imposition or possible imposition of a penalty, and generally include information that is more than one year overdue. If the Agency accepts the disclosure, the taxpayer must pay the taxes owing, plus interest. However, the taxpayer will not be subject to penalties or prosecution for the amounts disclosed.
The taxpayer must initiate voluntary disclosure. A disclosure is not considered voluntary if it results from audit or enforcement actions taken by the Agency.
To find out more about the Voluntary Disclosure Program, please use the following link: http://www.cra-arc.gc.ca/gncy/nvstgtns/vdp-eng.html.
As stated in Information Circular 70-6R5, this opinion is not an advance income tax ruling and is not binding on us.
Best regards,
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy Regulatory Affairs Branch.