5-912194 24(1)
Dear Sirs:
Re: 24(1)(the "Board") Deferred Self Funded Leave Plan ARE - 779 Dated June 5, 1981
We are writing in reply to your letter of August 9, 1991, in which you ask us to explain the discrepancy between the above-noted ruling and 39 concerning the reporting of interest income accrued on deferred salary amounts.
The Income Tax Act provisions relating to self funded leave plans were amended in 1988 and were effective for employees who were members of plans before July 28, 1986 but whose salary deferrals commenced after 1986, and for employees who joined plans after July 27, 1986.
Self funded leave plans which were in place before July 28, 1986, and which were not funded by the employer, are considered to be "investment contracts" as that term is defined in the Income Tax Act (the "Act"). For employees who started to defer their salaries before 1987, interest income earned on their accounts should be reported on a T5 slip on the third anniversary of the date the employee joined the plan and every three years thereafter. Alternatively, the employee may elect to report such interest income on an annual basis. The T4 slip issued in the leave year would not include the accrued interest amounts already reported.
For employees who became members of the plan after July 27, 1986, or who did not commence to defer their salaries until after 1986, interest income accrued in a year must be paid to the employee in the year and reported on a T4 slip. The comments in 39 reflect the law which came into force in 1986.
In our telephone conversation of November 28, 1991 (19(1)/Spice), you asked us to comment on the tax consequences if the interest income were re-contributed by the employee to the plan. Such re-contributed interest income would be deducted from gross salary for purposes of CPP contributions and income earned on the re-contributed amounts must be paid out in the year and reported as T4 income. The interest income, however, would not be considered part of the salary and wages used to calculate the 33 1/3% maximum for annual deferrals.
To conclude, the provisions of your plan are accurate with respect to employees who became members after July 27, 1986 inasmuch as interest income should be reported as employment income on a T4 slip. The income, however, must be reported annually, paid in the year to the employee, and cannot remain in the employee's account unless re-contributed and traced for the purposes listed in the foregoing paragraph.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate