Principal Issues: 1. Whether an arrangement would constitute a "salary deferral arrangement" within the meaning of subsection 248(1). 2. Whether an arrangement would meet paragraph (k) of the SDA definition if the actual receipt of the payment under the arrangement is made after three years.
Position: 1. Question of fact whether under a plan or arrangement, a legal right exists in a taxation year to receive an amount after the year. 2. The law requires that an amount has to be paid within the three-year period following the calendar year in which the right to receive the bonus arose.
2005-011443
XXXXXXXXXX G. Moore
(613) 957-8982
May 2, 2005
Dear XXXXXXXXXX:
Re: Salary Deferral Arrangement
This is in response to your letter of February 3, 2005, inquiring about whether the arrangements described in two hypothetical scenarios would be salary deferral arrangements.
In the first scenario, a corporation sets up a reserve for wages to the owner/manager of the corporation but does not deduct it for tax purposes, nor does it have any plans to deduct it in the future. This reserve continues for more than 3 years. When the owner decides to take a salary, the reserve will be reversed and a salary will be paid out to the owner. No Minutes of the corporation's Board of Directors meeting exist authorizing the accrual of the amount nor is the company under any legal obligation to pay the amount.
In the second scenario, a corporation sets up an actual liability for wages for the owner of the corporation. Minutes of the corporation's Board of Directors document the liability for unpaid wages to the owner. The liability remains unpaid beyond the three-year period.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
Our Comments
Further to the telephone conversations (Moore/XXXXXXXXXX) of April 4 and 6, 2005, the two hypothetical scenarios described in your letter were discussed in relation to the definition of a "salary deferral arrangement" in subsection 248(1) of the Income Tax Act (the "Act"). As was noted, it is a question of fact whether a taxpayer has the right in a taxation year to receive an amount after the year.
During the conversations, paragraph (k) of the definition of "salary deferral arrangement" in subsection 248(1) of the Act was also discussed. It was confirmed that for a plan or arrangement to qualify under paragraph (k) of that definition, a taxpayer who has a right to receive a bonus or similar payment in respect of services rendered by the taxpayer in a taxation year has to be paid the bonus or similar payment within 3 years following the end of the year.
We trust that these comments will be of assistance.
Yours truly,
Roberta Albert, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch