| 19(1) | File No. 5-9263 |
| A.B. Adler | |
| (613) 957-8962 |
March 28, 1990
Dear Sirs:
Your letter dated December 8, 1989, and addressed to Mrs. C. Gouin-Toussaint, concerning a deferred salary leave plan ("Plan") was recently referred to this office for reply.
Paragraph 6801(a) of the Income Tax Regulations ("Regulations") (photocopy enclosed) provides the detailed requirements with which your Plan need comply. Our comments with respect to your Plan are as follows:
1. Concerning 24(1) of the Plan, it should be made clear that income (including realized capital gains net of realized capital losses) of the Plan for each year ending during the period of deferral that has been earned for the benefit of the member must be paid in the year to the member, and is required to be treated as income from employment. Accordingly, form T4 should be used to report the income and the usual tax withholdings and remittances must be made. However, it would be acceptable for a member of the Plan to enter into a separate agreement with the trustee whereby a portion of a member's share of any year's income is retained by the trust provided his full share of such income is included in employment income for that year. (This is considered as a payment to the member and a recontribution to the Plan.)
2. Concerning 24(1) of the Plan,
(i) it is not acceptable for a member to receive benefits thereunder upon the member's retirement except in unusual circumstances, for example, where the member has sustained severe and prolonged disability (subparagraph 6801(a)(i) of the Regulations). Note also that 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,".
(ii) the Plan should provide that no amount held for the benefit of a member thereunder be paid to the member or in the event of his death to his legal representative 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). 24(1) Should you wish to pursue this issue we suggest that you consider writing to the relevant tax policy officials at the Department of Finance.
(iii) it should be made clear that the maximum percentage deferral in any taxation year of a member cannot exceed 33-1/3% of the amount of salary or wages that the member would normally receive in that year (subparagraph 6801(a)(ii) of the Regulations).
(iv) subparagraph 6801(a)(i) of the Regulations provides that the latest date for the commencement of the leave is six years after the date on which the deferrals for the leave of absence commence.
(v) note that a change in a period of leave, a temporary transfer to another employer or even a suspension from participation cannot result in the period of deferral extending beyond six years after the date on which deferrals commenced (per subparagraph 6801(a)(i) of the Regulations).
(vi) we require the Plan to provide that during the leave of absence a member may not receive any 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)(ii)(A) or (B) of the Regulations.
(vii) during the leave of absence the deduction of certain amounts in respect of continuing benefits of employment from deferred amounts under the Plan is not to reduce the gross deferred salary for T4 reporting purposes.
Our comments with respect to the four specific questions raised in your letter follow.
1. It is our position that unemployment insurance premiums are to be based on the employee'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 employee during the leave period.
2. It is our position that Canada Pension Plan ("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. Where 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 to be an employer of that employee and is therefore required to pay the employer's CPP contributions in respect of that employee. Where the trustee/employer recovers the employer's CPP contributions from amounts other wise 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.
3. Yes. Refer to our comment 1. on page one of this letter.
4. There is no requirement in the Income Tax Act or in section 6801 of the Regulations that your Plan be officially approved by any federal government Department.
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,
F. Francisfor DirectorFinancial Industries DivisionRulings Directorate