5-913357 24(1)
Dear Madam:
This is in reply to your letter of November 18, 1991 concerning deferred salary leave plans.
More particularly, you are concerned with the requirement in subparagraph 6801(a)(v) of the Income Tax Regulations that after the leave of absence, the employee must return to his regular employment with the employer or an employer that participates in the same or similar arrangement. In this regard, you ask for the Department's position where this requirement is not met for various reasons. For example, you mention that the employee might quit after the leave period and not return to an employer with the same type of plan, or the employee might be laid off due to economic circumstances.
Pursuant to subparagraph 6801(a)(v), the arrangement between the employer and the employee must provide that after the leave of absence the employee is to return to his regular employment with the employer, or an employer that participates in the same or a similar arrangement, for a period that is not less than the period of the leave of absence. Where the arrangement contains such a provision and due to unforeseen circumstances occurring during the leave period the employer is unable to fulfill its commitment; e.g., it becomes necessary to lay off the employee after the leave period due to economic circumstances, the Department will normally not reassess to deny the deferral of tax otherwise available by virtue of the arrangement. Where at a time during the deferral period it becomes evident that the employee will be laid off before the commitments under the arrangement can be fulfilled, we would expect the arrangement to be terminated at that time with the usual tax consequences for such termination. Where it is reasonable for the employer to expect an employee to fulfill a commitment but the employee reneges on that commitment, the Income Tax Act does not impose any penalty on employees who fail to comply with agreements with their employers.
We trust our comments are of assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate