| 5-921257 | |
| 24(1) | M.P. Baldwin |
| (613) 957-8953 |
Attention: 19(1)
May 5, 1992
Dear Sirs:
Re: Self-Funded Leave Program
This is in reply to your letter of September 19, 1991 in which you requested our comments on whether the Self-Funded Leave Program (the "Plan") complies with the provisions of section 6801 of the Income Tax Regulations (the "Regulations"). We apologize for the delay in replying to your letter.
Our review of the provisions under the Plan indicates that there are some deficiencies which should be amended to ensure that the Plan complies with the Regulations.
1. The Plan should clearly indicate that it is not established to provide benefits to the participants on or after retirement.
2. Clause(24(1)) of the Plan must be amended to provide that interest earned and attributable to a participant in a year must be paid in that year to the participant as employment income. Clause 6801(a)(iv)(B) of the Regulations provides that where deferred amounts are held by or for the account of any person other than a trust referred to in clause 6801(a)(iv)(A) of the Regulations, any amount in respect of interest or other additional amounts that may reasonably be considered to have accrued to or for the benefit of the employee to the end of a taxation year must be paid in the year to the employee.
While the Plan may properly refer to these amounts as accrued interest, it is our view that they are employment income for purposes of the Income Tax Act. In consequence, the amounts, when received, must be included on the participant's T4 supplementary and will be subject to income tax withholdings.
3. Clause 24(1) of the Plan must also be amended to provide that, pursuant to subparagraph 6801(a)(vi) of the Regulations, the participant has to be paid out of the Plan no later than the end of the first taxation year that commences after the end of the deferral period.
4. The Plan must provide, pursuant to subparagraph 6801(a)(iii) of the Regulations, that throughout the period of leave of absence, the employee does not receive any salary or wages from the employer or from a person with whom the employer does not deal at arm's length other than the amount by which the employee's salary under the Plan was deferred and reasonable fringe benefits.
5. Clause 24(1) This provision may indicate that the main purpose of the Plan is not to fund a leave of absence but rather to defer income taxes. As a consequence thereof, the Plan should be amended to give the employee the right to withdraw funds only in the case of financial or other hardship.
6. Clause 24(1) Pursuant to subparagraph 6801(a)(i) of the Regulations, the deferral period can not exceed six (6) years after the date on which the deferrals for the leave of absence commence. Accordingly, clause 24(1) will have to be amended to ensure the deferral period does not extend past six years.
7. The Plan must provide, pursuant to paragraph 6801(a)(v) of the Regulations, that the employee return to the employer or an employer that participates in a similar arrangement after the period of leave for a period that is not less than the period of the leave of absence. Clause 24(1) of the Plan will have to be amended accordingly.
Comments
It is the Department's position that Canada Pension Plan ("CPP") premiums are to be based on the employee's salary net of the deferred amounts during the period of deferral 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, while 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)952-8179 or to the following address:
Coverage Policy and Legislation SectionSource Deduction DivisionRevenue Canada Taxation875 Heron RoadOttawa, OntarioK1A 0L8
It is also the Department's position that Unemployment Insurance Premiums are to be based on the participant's gross salary before deferrals during the period of deferral and no premiums are to be withheld from the deferred amounts when paid to the participant during the leave period.
Enclosed is a copy of Income Tax Ruling ATR-39 Deferred Salary Leave Plan ("DSLP") for your information and guidance on the Department's position with respect to DSLP's.
We trust the above comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch