| 19(1) | File No. 5-9520 |
| D.S. Delorey | |
| (613) 957-3495 |
February 26, 1990
Dear Sir or Madam:
Re: Deferred Salary Leave Plan
This is in reply to your letter of February I, 1990 concerning your proposed deferred salary leave plan (the "Plan").
You enclosed with your letter a copy of the Plan, together with a copy of a proposed Memorandum of Agreement ("Schedule A") to be signed by a participant, and request a "tax ruling" with respect thereto. We are unable to provide the requested ruling since such rulings are given only in reply to requests submitted in the manner set out in Information Circular 70-6R, a copy of which is enclosed for your perusal. The current hourly rate is $65 and the current minimum fee that must accompany such request is $325. We nevertheless offer the following general comments.
As indicated on page I of the Plan, the provisions that govern deferred salary leave plans are contained in paragraph 6801(a) of the Income Tax Regulations (the "Regulations"). Our review of the submitted material indicates that the Plan, in general, complies with those provisions. We did note, however, the following:
(24(1)
2. The maximum 33 1/3 percent deferral set out in subparagraph 6801(a)(ii) of the Regulations relates to salary or wages earned in a calendar year, rather than in a school year. 24(1)
3. Pursuant to subparagraph 6801(a)(iii) of the Regulations, the Plan must provide that throughout the leave period the participant will not receive any salary or wages from the employer, or from any other person or partnership with whom the employer does not deal at arm's length, other than the deferred amounts and reasonable fringe benefits. 24(1)
4. The Plan must provide that any earnings (interest or otherwise) accrued in a calendar year on a participant's deferred amounts must be paid to the participant by December 31 of that year. 24(1)
Any such earnings paid to a participant under the Plan represent employment income rather than income from property. Accordingly, form T4 should be used by the financial institution to report the interest and the usual tax withholdings and remittances must be made. We suggest that this requirement be commented on in the Plan. 24(1)
7. It should be noted in the Plan that unemployment insurance premiums will be based on the gross salary during the deferral period and will not be payable during the leave period, and that Canada pension plan ("CPP") deductions will be based on net salary during both the deferral period and the leave period. Where the deferred amounts are paid to the employee by a trustee, that trustee is deemed to be an employer of the employee by the CPP Act and is therefore required to pay the employer's contribution in respect of that employee. If the employee is to pay both his portion and the employer's portion during the leave period (a matter to be arranged between the employer and the employee) and the trustee/employer recovers the employer's portion from amounts otherwise payable to the employee, the amount so recovered will not form part of the employee's gross salary.
As stated above, this letter is not an advance income tax ruling but is merely a statement of opinion on the specifics of your proposed Plan and is not binding on the Department, as stated in paragraph 24 of the enclosed Information Circular 70-6R. However, should your Plan be amended as indicated above, it is our opinion that it would meet the requirements set out in paragraph 6801(a) of the Regulations.
We trust that our comments are of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate