| 19(1) | File No. 5-8229 |
| A.B. Adler | |
| (613) 957-8962 |
June 22, 1989
Dear Sirs:
Your letter of May 15, 1989, that was sent to the Toronto District Office has been forwarded to this office for reply.
We understand that you are interested in establishing a deferred salary leave plan ("Plan") for employees of 19(1) Further, you have provided a copy of the Plan for our review and comments.
Our comments are as follows:
(i) There is no requirement under the Income Tax Act or Income Tax Regulations ("Regulations") that your Plan be approved by this Department. Paragraph 6801(a) of the Regulations (photocopy enclosed) provides the detailed requirements with which your Plan need comply.
(ii) Concerning the reference to 19(1) in your letter, note that the period of deferral for an employee participating in the Plan cannot extend beyond 19(1) after the date on which deferrals for the leave of absence commence (per subparagraph 6801(a)(i) of the Regulations).
(iii) Paragraph 19(1) of the Plan should make it clear that the maximum percentage deferral in any taxation year of a participant would normally receive in that year (subparagraph 6801(a)(ii) of the Regulations).
(iv) Concerning subparagraph of the Plan, Subparagraph 6801(a)(iv) of the Regulations provides for the deferral amounts to be held in a specific trust arrangement or in a deposit or similar arrangement. Further, any income therefrom for each year ending during the period of deferral that has been earned for the benefit of the participant must be paid in the year to the participant, and is required to be treated as income from employment. Accordingly, from T4 should be used by the trust company, bank, etc. to report the income and the usual tax withholdings and remittances must be made. Note that in order to comply with the payment of interest in the year requirement, employees could enter into separate agreements with their employer whereunder the employer is instructed to retain the income as recontributions by the employees to the Plan.
Further, we require that the Plan provide that during the period of such leave a participant may not receive nay salary or wages from the employer or any other person or partnership with whom the employer does not deal at arm's length except as provided in clause 6801(a)(iii)(A) or (B) of the Regulations.
(v) Subparagraph of the Plan apparently permits voluntary withdrawals therefrom. A voluntary withdrawal provision is of concern to us since it may indicate that one of the main purposes of the Plan is to defer taxes rather than permit employees to fund a leave of absence. We recommend that the Plan be amended to permit an employee participating thereunder to withdraw from the Plan only in the case of financial or other hardship, and that all such cases be subject to approval by appropriate representatives of the Clinic.
(vi) Concerning subparagraph of the Plan, note that a change in a period of leave cannot result in the period of deferral extending beyond after the date on which deferrals for the leave of absence commenced (per subparagraph 6801(a)(i) of the Regulations).
(vii) Concerning paragraph of the Plan, it is our position that unemployment insurance premiums should be based on gross earnings, including the deferral amounts, in the period of deferral and no such premiums are required during the leave of absence period. Further, the withholding requirements for Canada Pension Plan premiums for purposes of section 6801 of the Regulations are currently under study accordingly.
(viii) Concerning paragraph of the Plan, subparagraph 6801(a)(v) of the Regulations requires that after the leave of absence the participant "is to return to his regular employment with the employer ....for a period that is not less than the period of the leave of absence,".
(xi) The Plan should provide that no amount held for the benefit of an employee thereunder be paid to the employee at a time that is later than the end of the first taxation year that commences after the end of the period of deferral (subparagraph 6801(a)(vi) of the Regulations).
The above comments are an expression of opinion only and are not binding upon the Department.
We trust that our comments will be of assistance to you.
Yours truly,
for Director Financial Industries Division Rulings Directorate