5-903695
Dear Sirs:
Re: Deferred Salary Leave Plan (DSLP)
This is in reply to your letter of December 20, 1930 requesting our comments on the DSLP to ensure the DSLP complies with the provisions of 6801 of the Income Tax Regulations (the "Regulations"). Our review of the provisions under the DSLP indicates that there are some deficiencies which should be amended to ensure that the DSLP complies with the Regulations.
1. The DSLP should clearly indicate that it is not established to provide benefits to the participants on or after retirement.
2. The DSLP makes reference to the school year. Such references may be appropriate for the administration of the Plan and may, for tax purposes in general, not result in any adverse tax consequences or cause non-compliance with the provisions of section 6801 of The Regulations. Caution, however, should be exercised in this regard.
24(1)
Subparagraph 6801(a)(ii) of the Regulations, however. requires that the percentage deferral in any taxation year of the teacher must not exceed 33 1/3% of the amount of salary that the teacher would normally receive in that year. A taxation year for an individual is usually the calendar year. In our view, the provision should be revised to ensure the maximum percentage deferral allowed will also be limited on a calendar year basis as provided in the Regulations.
3. It should be noted that the Plan is not an investment contract" under paragraph 12(11)(a) of the Income Tax Act. Clause 3.4 of the Plan must be amended to provide that interest earned and attributable to a participant in a year must be paid in that year to the participant as employment income. Clause 6801(a)(iv)(A) the Regulations provided that where deferred amounts are held by or for the account of any person other than a trust referred to in clause 6801(a)(iv)(A) of the Regulations, any amount in respect of interest or other additional amounts that may reasonably be considered to have accrued to or for the benefit of the employee to the end of a taxation year must be paid in the year to the employee.
While the Plan may properly refer to these amounts as accrued interest, it is our view that they are employment income for purposes of the Act. In consequence, the amounts, when received, must be included on the participants T4 supplementary and will be subject to withholdings by the Board
4. The DSLP must provide, pursuant to subparagraph 6801(a)(iii) of the Regulations, that throughout the period of leave of absence, the employee does not receive any salary or wages from the employer or from a person with whom the employer does not deal at arm's length other than the amount by which the employee's salary under the DSLP was deferred and reasonable fringe benefits.
24(1)
5. Clause 4.6 of the DSLP should be expanded to provide that the minimum leave of absence cannot be less than:
(A) where the leave of absence is to be taken by the employee for the purpose of permitting the full time attendance of the employee at a designated educational institution (within the meaning assigned by subsection 118.6(1) of the Act), 3 consecutive months, or
(B) in any other case, 6 consecutive months.
Comments
It is the Department's 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. When the deferred amounts are paid to the employee by a trustee of the Plan during the lease period, that trustee is deemed by the CPP Act to be an employer of the employee and is therefore required to pay the employer's CPP contribution in respect of that employee. Where the trustee/employer recovers the employer's CPP contribution from amounts otherwise 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.
Although the trustee is deemed under the CPP Act to be an employer, the employee does not enter into new employment with the trustee when he goes on leave. Consequently, while CPP contributions that are required to be paid during his leave period are to be deducted and remitted by the trustee as by any other employer, CPP contributions paid in the year prior to the leave period must be taken into consideration by the trustee. For example, if the required CPP contributions for a year by an employee were $600, and the employee contributed $400 before going on leave, the trustee would be required to deduct and remit CPP contributions for that year of $200 on behalf of the employee, plus the employer's portion.
The trustee will be required to prepare T4s reflecting the amount paid by the trustee to the employees under the Plans and, among other things, the CPP contributions. However, since CPP contributions made during the year prior to the leave period are to be taken into consideration by the trustee, the amount of contributory earnings must be recorded by the trustee may not coincide with the earnings reported in box "C" for that particular year. If such is the case, the amount of contributory earning must be recorded in box "I" of the T4 which should in turn coincide with the amount of contributions reported in box "D". There may also be instances where the trustee will not have made any deductions for CPP because the employee reached the maximum contributions prior to the leave period. If such is the case, a check mark should be indicated in box "J" of the T4 under CPP.
If further information is required concerning the trustee's responsibility with respect to CPP contributions or the preparation of T4s etc., the enquiry should be directed to Mr. Pierre M. Paquette at (613)952-8179 or the following address. Coverage Policy and Legislation Section Source Deductions Division Revenue Canada Taxation 875 Heron Road Ottawa, Ontario K1A 0L8
It is also the Department's position that Unemployment Insurance Premiums are to be based on the participant's gross salary before deferrals during the period of deferral and no premiums are be withheld from the deferred amounts when paid to the participant during the leave period.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate