5-910492
Dear Sirs:
Re: Deferred Salary Leave Plan (the "Plan")
We are writing in reply to your letter of February 12, 1991, in which you ask us to confirm if the above-noted plan meets the requirements of Section 6801 of the Income Tax Act Regulations.
We have reviewed the Plan and offer the following comments (reference to the clauses as numbered in the Plan).
4. 5 - Interest accruing on the deferred amounts is employment income for purposes of the Income Tax Act. You may wish, therefore, to indicate that each income will be subject to income tax withholdings (in third clause or 4.1.2) and will be reported on the participant's T4 supplementary.
5. 4 - All deferred amounts must be paid out no later than the end of the participants first taxation year following the end of the deferral period. It is not clear whether the frequency of payments mentioned in clause 5.4 will result in payment of the full amount within the required time limit.
5. 5 - This clause should be amended to read:
A participant shall not be employed by or receive income from 24(1) or from any other person or partnership with whom 24(1) does not deal at arm's length during the leave period.
5. 6.3.- In addition to the comments contained in this clause, a sentence similar to the one in clause 8.4.3 should be inserted i.e. the leave period must start by the end of the sixth year after salary deferral commended
5. 7.1. The participant may return to employment with 24(1) or with an employer that participates in the same or a similar arrangement. You may wish to indicate this since it affects the accuracy of the comments in 5.8.
7. 2 The purpose of the Plan is to fund a period of leave and not to permit a deferral of taxes. If a participant is permitted to withdraw on request, there is a potential for abuse in this respect. We suggest that withdrawal be subject to approval by 24(1) which approval would only be given on the ground that the participant will suffer financial hardship or for other good cause.
We hope these comments will assist you and will be pleased to review any amended Plan you wish to submit. The Department has recently issued Income Tax Ruling 39 on the subject of Deferred Salary Leave Plans, and a copy is enclosed for your additional information.
Yours truly,
for Director Financial Industries Division Rulings Directorate