| 5-921263 | |
| 24(1) | D.S. Delorey |
| (613) 957-8953 |
Attention:19(1)
May 12, 1992
Dear Sirs:
This is in reply to your letter of March 16, 1992, concerning your proposed salary deferral plan (the "Plan"). We would first like to inform you that there are no provisions under the Income Tax Act or the Income Tax Regulations (the "Regulations") requiring your Plan to be approved by this Department or by any other person. All that is required is that the Plan meet the requirements of paragraph 6801(a) of the Regulations, a copy of which is enclosed. Also enclosed is a copy of Income Tax Ruling ATR-39 which reflects a typical deferred salary leave plan. The Plan for the most part meets the requirements of paragraph 6801(a) of the Regulations. We note, however, the following deficiencies:
1. We note in 24(1) of the Plan the possibility that the leave period may be other than one academic year. Subparagraph 6801(a)(i) requires that the leave period be not less than 6 consecutive months, or not less than 3 consecutive months where qualifying educational leave is involved. We suggest that this requirement be incorporated into 24(1) of the Plan.
2. With respect to 24(1) of the Plan and the requirement in subparagraph 6801(a)(i) of the Regulations that the deferral period not exceed 6 years, the Plan should state that in no event will the deferral period, including postponements, exceed 6 years to ensure for greater certainty that this requirement is met.
3. To ensure compliance with subparagraph 6801(a)(ii), we suggest that a comment be added to 24(1) to the effect that in no event can the deferred salary exceed 33 1/3% in any one calendar year.
4. With respect to the requirement in subparagraph 6801(a)(iii), the Plan should 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.
5. To comply with subparagraph 6801(a)(iv), the Plan should provide that earnings (eg., interest) for a particular year on amounts held under the arrangement will be paid to the participant by December 3l of that year. These earnings represent employment income and the trustee should thus issue a T4, rather than a T5, and make the required withholdings.
6. With respect to 24(1) of the Plan, 24(1) of the Plan suggests that the leave period may be other than 12 months. To more closely reflect the wording of subparagraph 6801(a)(v), you may want to rephrase 24(1) to say that the participant agrees to return for a period not less than the leave period.
7. We suggest that the words "by the end of the year following the year of death" be added to 24(1) of the Plan to conform with the requirement in subparagraph 6801(a)(vi). Subparagraph 6801(a)(vi) requires that the arrangement provide for all amounts held for the employee's benefit under the arrangement to be paid to the employee out of or under the arrangement no later than the end of the first taxation year that commences after the end of the deferral period. Although indications are that the Plan meets this requirement, we suggest for greater certainty that it be specifically referred to. This requirement, together with the requirement in 6801(a)(i) that the deferral period not exceed 6 years, means that funds held under the Plan must be paid to the participant no later than the end of the seventh year after the commencement of the deferral period.
Canada Pension and Unemployment Insurance
The following comments reflect the Department's position concerning unemployment insurance premiums and Canada pension plan ("CPP") contributions. You may wish to include some or all of the comments in the Plan. Unemployment insurance premiums are to be based on the gross salary during the deferral period and are not payable during the leave period.
CPP contributions are to be based on the employee's salary net of the deferred amounts during the deferral period 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, although 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 Plans 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:
CPP/UI Programs SectionSource Deductions DivisionRevenue Canada Taxation875 Heron RoadOttawa, OntarioK1A 0L8
If the Plan is amended as noted above, it is our opinion that it will meet the requirements of paragraph 6801(a) of the Regulations. This letter is not an advance income tax ruling but is merely a statement of opinion on the specifics of your Plan and it is not binding on the Department. We trust, however, that our comments are of assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate