| 5-922305 | |
| P. Spice | |
| 957-8953 |
Treasury Board of CanadaSecretariatOttawa, CanadaK1A 0R5
Attention: Ms Suzanne Cardinal
September 4, 1992
Dear Ms Cardinal:
Re: Self-Funded Leave Plan
This is in reply to your letter of July 28, 1992, in which you ask us to confirm several items relating to participation in a self-funded leave plan. In particular, you comment on the ability of participants to withdraw from the plan, and the position of persons granted maternity leave during the deferral period.
Section 6801 of the Income Tax Act Regulations (the "Regulations") sets out the terms and conditions for self-funded leave plans. The provisions of relevance to this discussion are as follows. Subparagraph 6801(a)(i) of the Regulations requires that the arrangement to defer salary is established to permit the employee to fund a leave of absence from employment and not to provide benefits after retirement.
Subparagraph 6801(a)(v) of the Regulations states that the arrangement must provide that the employee return to regular employment with the employer after the leave of absence for a period equal to the leave of absence. The deferral period cannot exceed six years and the leave of absence must commence immediately after the deferral period ends (subparagraph 6801(a)(i) of the Regulations). Subparagraph 6801(a)(vi) of the Regulations requires that deferred amounts must be paid out no later than the end of the calendar year commencing after the deferral period ends.
Given these conditions, it is mandatory that the plan prohibit the employee from withdrawing from the plan at will, and that the employer ensure that the deferral period ends sufficiently in advance of any planned retirement by the employee. Otherwise, the plan might be utilized as an income-sheltering device where funds can be deposited free of tax and then withdrawn at any time and for any purpose.
In the event of death or termination of employment, the arrangement should provide that participation in the plan is terminated. Additionally, if the participant's circumstances change and continued participation in the plan would result in financial hardship, then the participant can withdraw from the self-funded leave plan with the permission of the employer. When this occurs, the deferred amounts must be paid out no later than the end of the calendar year commencing after the termination or withdrawal occurs.
Where the participant is unable to continue deferrals of salary on a temporary basis, such as when maternity leave is taken, but still wishes to take a leave of absence later, participation in the plan can be suspended and the deferred amounts can remain in the plan. Given the time limits for the deferral period and the commencement of the leave of absence, any such suspension cannot result in either (i) the deferral period lasting longer than six years (including the period of suspension), or (ii) the leave of absence starting later than immediately after the end of the deferral period.
We trust these comments will assist.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate