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:
1) How would payments from a grandfathered salary deferral plan be reported for purposes of the Act? 2) If employees previously included the annual interest accrued in respect of deferred amounts in their income, can the income inclusion be reduced to reflect the previously included amounts?
Position:
1) Payments from the plan would be reported as employment income. 2) Yes.
Reasons:
1) Amounts continue to represent employment income. 2) The provisions of 248(28) should apply where this is in fact the case.
November 9, 2000
PENTICTON TAX SERVICES OFFICE HEADQUARTERS CPP/EI Rulings M.P. Sarazin 824-5441 Attention: Kathy Forth, Technical Advisor 2000-005074
Reporting Payments out of Grandfathered Salary Deferral Arrangement
We are writing to you in response to your facsimile of October 6, 2000, requesting our views on how payments from a grandfathered pre-1986 salary deferral arrangement would be reported for purposes of the Income Tax Act (the "Act").
Facts
The XXXXXXXXXX (the "Client"), a municipal corporation situated in the Province of British Columbia, established a deferred compensation plan (the "Plan") for certain of its employees in XXXXXXXXXX.
When the salary deferral arrangement provisions were enacted in 1986, there was a grandfathering provision for deferred amounts under certain plans which were in existence on February 26, 1986. Only amounts relating to services rendered by a taxpayer before July 1986 could be deferred. However, continued deferrals under existing plans were allowed only where both of the following conditions were met:
(a) the employer was legally obligated to defer payment of amounts to the employee pursuant to an agreement in writing made with his employer or former employer before February 26, 1986; and
(b) the employee could not, at any time after June 1986, cancel or otherwise avoid that obligation.
The Client's Plan did not qualify for the continued deferral of salary paid after June 1986.
The Client has never issued an information slip for the interest earned in any year to the participants in the Plan. Salary deferrals under the Plan ceased in 1986 in accordance with the enactment of the salary deferral arrangement legislation. You have been advised that participants may have included the interest earned in respect of the Plan in their respective incomes over the years but the Client is not able to confirm this. Several participants in the Plan are retiring this year and the Client wants to know how to report the payments under the Plan.
Comments
The amounts paid by the Client to an employee in respect of salary deferred under a grandfathered salary deferral arrangement should be treated like amounts paid out of a prescribed plan or arrangement described on pages 31 and 32 of the Employers' Guide: Payroll Deductions (Basic Information) 1999-2000 (T4001E). Deferred amounts in these cases are treated as employment income in the year that the employee receives them. Consequently, the full amount paid should be reported on a T4.
Where the recipient has already included part of the amount received in his or her income in a previous year, the recipient should go to the appropriate tax services office to see if subsection 248(28) of the Act would apply in respect of such amounts. The determination of whether amounts were previously included in an employee's income in a previous year is a question of fact which may be confirmed by the relevant tax services office.
We note that the terms of the Plan itself should be reviewed in order to determine when amounts should be included in an employee's income. The salary deferral arrangement provisions in the Act may apply where the Plan provides for an immediate payout of deferred amounts on retirement and an employee requests that the deferred amount be paid out in instalments over several years after his or her retirement.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate