5-910052
Dear Sirs:
Re: Deferred Salary Leave Plan (the "Plan")
This is in reply to your letter of January 29, 1991, referred to us by our Registration Directorate, requesting a ruling in respect of the above noted plan for purposes of the definition of salary deferral arrangements.
We have reviewed your plan and are of the opinion that, in general, it complies with the provisions of section 6801 of the Income Tax Regulations (the "Regulations") which governs deferred salary leave plans. We did note, however, some concerns which you should address in order to make the plan fully compatible with the Regulation.
24(1)
The Regulation allows this reduced leave of absence period when an employee is in full-time attendance at a designated educational institution as defined in subsection 118.6(1) of the Income Tax Act (the "Act"). The regulation does not require Revenue Canada's approval in order for it to apply and, at this time, we do not anticipate the provision of such approvals on an on-going basis. The onus to substantiate compliance with the provision must rest with the employer and employee.
A designated educational institution is defined in subsection 118.6(1) as:
(a) an educational institution in Canada that is
(i) a university, college or other educational institution designated by the Lieutenant Governor in Council of a province as a specified educational institution under the
Canada Student Loans Act or recognized by the Minister of Education of the Province of Quebec for the purposes of the Student Loans and Scholarships Act of the province of Quebec, or
(ii) certified by the Minister of Employment and Immigration to be an educational institution providing courses, other than courses designed for university credit, that furnish a person with skills for, or improve a person skills in, an occupation.
(b) a university outside Canada at which the individual referred to in subsection (2) was enrolled in a course, of not less than 13 consecutive weeks duration, leading to a degree, or
(c) if the individual referred to in subsection (2) resided, throughout the year referred to therein, in Canada near the boundary between Canada and the United States, an educational institution in the United States to which he commuted that is a university, college or other educational institution providing courses at a post-secondary school level;
2. Part III, Article 4(iii)
24(1)
While generally this should not result in any problems, it must be noted that the maximum deferral permitted under the Regulation is 33-1/3% of the actual salary or wages that the employee would receive in the absence of the Plan.
3. Part III, Article 5
This provision should indicate that, in all circumstances, all monies held under the plan in respect of an employee must be paid out no later than the end of the first calendar year that commences after the end of the deferral period.
4. Part III, Article 6 (iii)
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 leave 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 the 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 reported 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 earnings 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 to 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.
5. Part III, Article 6 (iv)
24(1)
This provision must be extended to include interest accrued and paid in accordance with Article 9 of the Plan.
6. Part III, Article 7 (ii)
24(1)
It should be noted that a period of suspension is included in the deferral period and that the leave of absence must commence immediately after the deferral period and not later than six years from its start.
Please be advised that this letter is not an advance income tax ruling, as requested, but is merely a statement of opinion on the specifics of
your proposed plan and as such, it is not binding upon the Department. While in our view an advance income tax ruling should not be necessary if the plan is amended as discussed above, should you still desire one, we must advise that it may only be provided when the procedures for its request are compiled with. A proper request entails the provision of all related documents for our review as well a an identification of all of the specific provisions of the Act in respect of which the request is to be considered. The procedures are discussed at length in our Information Circular I.C. 70-6R2, a copy of which is attached for your reference. Also enclosed, please find 39 which was recently published.
We trust these comments will be satisfactory to your needs.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate