5-911736
Dear Sirs:
Re: Deferred Salary Leave Plan
We are writing in reply to your letters of June 4 and July 12, 1991, in which you ask a number of questions concerning the above-noted topic.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where the particular transactions are completed, the enquiry should be addressed to the relevant District Taxation Office. The following comments are, therefore, of a general nature only, and are not binding on the Department.
In the June 4th letter you ask for our interpretation of the phrase "six consecutive months" which appears in Regulation 6801 of the Income Tax Act (the "Act"). The Regulation requires that a leave of absence have a duration of at least this length of time.
In our view a leave of absence will qualify for purposes of Regulation 6801 if there are six full months of leave. Part months do not count in the calculation. To use your examples, a leave of absence which commences on January 31 and concludes on June 30 is unacceptable since the leave encompasses only five months. A leave which starts February 1 and ends September 4 covers seven months and, therefore, complies with the Act. In the latter case, however, if the participant in the leave plan is not employed in the months of July and August, there could be no leave granted for those months and therefore the period from February 1 to the last day of employment in June would not meet the required minimum leave time. A participant who is employed in July and August by the employer would be considered to have taken a continuous leave from February 1 to September 4. It would be irrelevant that the participant is not normally required to report to duty in those months.
Please note that this opinion differs from the one provided in the letter of December 7, 1990, to which you refer in your letter of June 4th. The Department's current position is that the crucial issue is that of a continued employment relationship between the participant and employer; the fact that the employment contract grants automatic leave between semesters is not considered to impede the ability of the employer to enter into an agreement covering salary deferral for the same period of automatic leave.
To summarize, a teacher who has been granted leave for the period between semesters under his or her employment contract is eligible to enter into a later written arrangement with his or her employer to fund a leave of absence which includes the period or periods of leave previously negotiated.
Referring to your letter of July 12th, our responses to your numbered queries follow:
1. "Designated educational institutions" are defined in subsection 118.6(1) of the Act and include some schools that have job retraining or education courses, most universities and colleges in Canada, universities out-side Canada if the student is enrolled in a course leading to a degree which course is at least 13 consecutive weeks long, and universities or colleges in the U.S. if the student lives in Canada near the border and commutes to the school. Please refer to paragraphs 13 and 14 of Interpretation Bullet IT-515 ("Education Tax Credit") for further information concerning these institutions (copy enclosed).
2. The written arrangement between the participant and the employer must be for the main purpose of permitting the participant to fund a leave of absence which leave of absence is to be taken "for the purpose of permitting full-time attendance ... at a designated educational institution". The Department will look at the terms of the arrangement to determine whether this purpose is explicitly expressed and whether the surrounding circumstances support a finding that the arrangement is for this purpose. If admission to such a course is contingent on meeting certain prerequisites, then it would be reasonable to require in the arrangement that the participant provide the employer with some indication of how he or she intends to satisfy those prerequisites. An actual letter of admission six years in advance would not be necessary.
3. If at any time during the deferral period, the participant becomes aware that he or she will not or cannot be admitted to a designated educational institution at the end of the agreed-upon deferral period, the arrangement should provide that the arrangement will be terminated with the usual tax consequences for such termination. The Department recognizes that a written arrangement may provide for termination of the salary deferral for certain reasons (e.g. termination of employment, financial hardship). If leave has already been granted and the participant does not attend at the institution, the Department would look at the circumstances to determine whether the salary should be taxed in the years in which it was deferred or in the year of receipt. The fact that the participant does not attend at the institution as arranged, may be an indication that it was never intended that the salary be deferred for that purpose and, therefore, also cause the arrangement to fail to meet the requirements of Regulation 6801.
4. The employer is under an obligation to enter into a written arrangement as described in 2 above. If it fails to take reasonable steps to ensure that the participant take the leave for the purpose for which it was expressly granted, this may indicate that neither party intended the leave to be granted for that purpose. What would be considered reasonable steps will depend on the circumstances of the particular case.
5. The participant should obtain a letter or other document from the designated educational institution which proves that he or she was in full-time attendance at the institution for at least three months. Paragraphs 8 through 12 of the enclosed Interpretation Bulletin discuss the meaning of full-time attendance.
We trust the foregoing comments will be of assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch