5-912185
December 4, 1991
Dear Sirs:
Re: Deferred Salary Leave Plan (the "Plan")
This is in reply to your letter of August 6, 1991 with an enclosed copy of the above-mentioned Plan for which you request our review and approval as an acceptable deferred salary leave plan in accordance with the provisions of paragraph 6801(a) of the Income Tax Regulations (the "Regulations").
A deferred salary leave plan does not have to be approved by the Department in order for it to comply with the provisions of section 6801 of the Regulations. However, a confirmation that your Plan does meet these provisions can be obtained in the form of an advance income tax ruling if you so desire and a request for it is submitted in the manner set out in Information Circular 70-6R2, a copy of which is enclosed.
This letter is not an advance income tax ruling but is a statement of opinion on the specifics of your proposed Plan and as such is not binding on the Department. We have, however, reviewed your Plan and are of the opinion that it will be a prescribed plan under paragraph 6801(a) of the Regulations provided it is amended and/or administered as follows:
1. The Plan,in a number of provisions, 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. However, caution should be exercised in this regard.
In particular, Clause 24(1) and 24(1) of the Plan provides that a teacher may, in respect of each school year, defer a percentage of his or her current compensation amount not in excess of 33 1/3% per year, subject to limits set out therein, for a maximum of six school years. Subparagraph 6801(a)(i) of the Regulations, however, requires that the percentage deferral in any taxation year of a participant must not exceed 33 1/3% of the amount of salary that the employee would normally receive in that year. A taxation year for an individual is usually the calendar year and accordingly, in our view, the provision should be revised to ensure that the maximum percentage deferral allowed will also be limited to 33 1/3% on a calendar year basis.
2. Clause 24(1) of the Plan provides that the interest earned will be paid out to a participant on December 31st of each year in which the participant is a member of the Plan.
For greater certainty, it should be noted and the Plan might indicate that these amounts are to be treated as employment income for purposes of the Income Tax Act and, in consequence, the amounts, when paid, must be included on the employee's T4 supplementary and the usual tax withholdings and remittances must be made by the employer.
3. Clause 24(1) of the Plan provides that the tax to be deducted on amounts held under the Plan will be dependent on the school board receiving a ruling from Revenue Canada that the Plan is acceptable. As we noted above this letter is not such a ruling.
4. Clause 24(1) of the Plan should be expanded to indicate that the leave of absence must follow immediately after the deferral period.
5. Clause 24(1) of the Plan provides for withdrawal from the Plan. We suggest that, to be more precise, the clause should provide that withdrawal may only be approved where it is reasonable in the circumstances such as for financial or other hardship.
6. Clause 24(1) of the Plan is in error in that the Regulations do not require amounts to be paid out in the seventh year. The Regulations require that a deferral period may not exceed six years in duration and that all amounts held under the Plan must be paid out by the end of the first taxation year which commences after the deferral period what ever its length. A year of a deferral period may or may not coincide with a calendar year.
Clause 24(1) may more appropriately be worded to indicate that notwithstanding clauses 24(1) or any combination thereof, a deferral period may not be extended to exceed six years in duration.
7. Under the Regulations, the board could, if it so desired, extend the provisions of Clause 24(1) to indicate that an employee may also return to his regular employment with the employer or with an employer that participates in the same or a similar arrangement after the leave of absence for a period that is not less than the period of the leave of absence.
8. The Plan provides that amounts will be paid out within 60 days in the event of withdrawal from the Plan under clause 24(1) or on the participant's death under clause 24(1). To comply with subparagraph 6801(a)(vi) of the Regulations, the Plan must also provide that notwithstanding these provisions or any other provision, all amounts will be paid out of the Plan no later than the end of the first taxation year that commences after the end of the deferral period.
9. With respect to clause 24(1) of the Plan please note that 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 Plan 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) 952-5433 or to the following address:
Coverage Policy and Legislation Section Source Deductions Division Revenue Canada Taxation 875 Heron Road Ottawa, Ontario K1A 0L8
For your assistance, please find enclosed the Department's publication 39 which describes a deferred salary leave plan that complies with the requirements of the Act.
We trust the foregoing comments will assist you.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch