5-911328
Dear Sir:
Re: Deferred Salary Leave Plan (the "Plan") Section 6801 of the Income Tax Regulations (the "Regulations")
This is in reply to your letter of May 10, 1991 with an enclosed copy of your proposed Plan. You have requested that we confirm that the content of the Plan complies with the provisions of section 6801 of the Regulations.
Our review of the provisions under the Plan indicates that there are a number of deficiencies which should be amended to ensure that the Plan complies with the Regulations. These include:
1. The Plan should indicate clearly that it is not established to provide benefits to the participants on or after retirement.
2. Pursuant to subparagraph 6801(a)(iv) of the Regulations, the Plan must provide that any interest or additional amounts that may reasonably be considered to have accrued for the benefit of the employee in a year must be paid in that year to the employee. These amounts are to be treated as employment income for the purposes of the Income Tax Act. In consequence, the amounts, when received, must be included on the employee's T4 supplementary and the usual tax withholdings and remittances must be made.
Paragraphs 6(a) and (b) of the Plan should be amended accordingly.
3. The Plan must provide that an employee may not withdraw from the Plan in circumstances other than financial or other hardship, otherwise it may indicate that the main purpose of the Plan is to defer taxes rather than permit employees to fund a leave of absence.
24(1)
4. Pursuant to subparagraph 6801(a)(i) of the Regulations, the Plan must provide that the leave of absence is to commence immediately after the deferral period.
5. Paragraph 6(e) of the Plan should be amended to ensure that the maximum percentage deferral allowed (33 1/3%) will be limited on a calendar year basis as provided in the Regulations.
6. The Plan must provide that in the event an employee does not take his leave of absence in the designated period, the deferred amounts will be paid to the employee in the first taxation year that commences after the end of the deferral period.
7. Paragraph 9(b) of the Plan as written will allow a period of leave to be reduced from one year's duration. This paragraph should be subject to the provisions of clauses 6801(a)(i)(A) and (B) of the Regulations which require that a leave of absence may not 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.
8. 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 KlA OL8
Please be advised that this letter is not an advance income tax ruling but is merely a statement of opinion on the specifics of your proposed Plan and 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 desire one, we will be pleased to again review your Plan upon its amendment and issue a ruling thereon provided your request is made in the manner outlined in Information Circular 70-6R2, a copy of which is attached for your convenience.
We trust that our comments will be of assistance to you.
Yours truly,
For DirectorFinancial Industries DivisionRulings Directorate