24(1) 3-920540
D. S. Delorey
(613) 957-8953
Attention: 19(1)
March 11, 1992
Dear Sir or Madam:
Re: Deferred Salary Leave Plan Advance Income Tax Ruling E-292
This is in reply to your letter of January 29, 1992 concerning a proposed amendment to your deferred salary leave plan (the "Plan") to provide for leaves-of-absence of five months.
More particularly, you received an advance income tax ruling (E-292) dated March 25, 1983 with respect to the Plan. You now propose to amend the Plan to provide for leaves-of-absence from September 1 to January 31 of the following year, or from February 1 to June 30 of the same year, and you seek confirmation that our previous ruling will continue to apply to the proposed Plan. The proposal is designed to allow leaves-of-absence for one semester.
Our Comments
The provisions that govern deferred salary leave plans are contained in section 6801 of the Income Tax Regulations (the "Regulations"), a copy of which is enclosed for your information. As noted, paragraph 6801(a) of the Regulations applies to arrangements established on or after July 28, 1986, whereas paragraph 6801(b) of the Regulations applies to arrangements entered into before July 28, 1986. Consequently, advance ruling E-292 dated March 25, 1983, continues to be binding only with respect to an arrangement entered into between a teacher and the Board before July 28, 1986, where the arrangement satisfies the requirements set out in paragraph 6801(b) of the Regulations.
With respect to your proposal, subparagraph 6801(a)(i) of the Regulations provides that a leave of absence must not be less than 6 consecutive months except where the leave is to be taken for the purpose of attending full time at a designated educational institution for 3 consecutive months. A designated educational institution for this purpose is one described in subsection 118.6(1) of the Income Tax Act. A photocopy of that subsection is also enclosed for your information. Consequently, an arrangement containing a provision such as that proposed would not meet the requirements of paragraph 6801(a) of the Regulations with the result that any salary deferred thereunder would be required to be included in income in the year earned rather than in the year received.
Depending on the terms of the employment contract, it is possible for a teacher to be employed during the months of July and August notwithstanding that she/he is not required to report for work or to perform duties of employment during those months. Where a teacher is employed during July and August and schedules a leave from, for example, August 1 to January 31 of the following year, the "6 consecutive month" requirement referred to above would be met. Likewise, such a teacher who schedules a leave from, for example, February l to July 31 of the same year would also meet the "6 consecutive month" requirement.
With respect to whether or not an arrangement between a teacher and the Board under the proposed Plan would otherwise meet the requirements of paragraph 6801(a) of the Regulations, we have the following comments:
1. Subparagraph 6801(a)(i) provides that the deferral period cannot exceed 6 years and the leave period must commence immediately thereafter. Although part 24(1) of the proposed Plan indicates that these requirements would be met, we suggest for greater certainty that a comment be added at the end of part 24(1) to the effect that these requirements must be met in all situations.
2. Subparagraph 6801(a)(iii) provides that during the leave period the participant shall 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. This requirement should be referred to in the proposed Plan.
3. At part 24(1) of the proposed Plan, we suggest it be stated that such interest represents employment income to the recipient. Consequently, the trustee should issue a T4 rather than a T5 and make the required withholdings.
4. To comply with subparagraph 6801(a)(v), the proposed Plan should provide that the employee is to return to his or her regular employment with the employer, or 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.
5. 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 proposed Plan meets this requirement, we suggest for greater
certainty that it be specifically referred to. This requirement, together with the requirement that the deferral period not exceed 6 years, means that funds held under an arrangement must be paid to the employee 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 proposed 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:
Coverage Policy and Legislation Section
Source Deductions Division
Revenue Canada Taxation
875 Heron Road
Ottawa, Ontario
K1A 0L8
The $400 deposit submitted by you will be returned separately. The advance ruling fee has been increased to $90 per hour and the required deposit has been increased to $450. Accordingly, if you intend to amend the proposed Plan in accordance with the above comments and wish to have a binding ruling with respect to the amended Plan, the request should be accompanied by a deposit in the amount of $450.
Our comments are an expression of opinion only and are not binding on the Department as explained in paragraph 21 of the enclosed Information Circular 70-6R2. We trust, however, that they are of assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate