24(1)
5-900558
D.S. Delorey
(613) 957-3495Attention: 19(1)
May 10, 1990
Dear Sir or Madam:
Re: Deferred Salary Leave Plan (the "Plan")
19(1)This is in reply to your letter of April 18, 1990 concerning
amounts deferred by 19(1) under the Plan.
24(1)
As explained in paragraph 12 of Information Circular 70-6R (copy
enclosed), an advance income tax ruling ceases to be valid from
the effective date of a change in the law on which the ruling was
based and the taxpayer will not be so notified by the Department.
Thus, because there has been a change in the law on which the
above mentioned Ruling was based, that Ruling is no longer valid.
The following comments explain the current law as it relates to
self-funded leave plans in general and to 19(1) in particular.Plans Entered Into After July 27, 1986
Self-funded leave plans entered into by an employee and his employer after July 27, 1986 must comply with the requirements of paragraph 6801(a) of the Income Tax Regulations (the "Regulations") in order for the employee to defer taxation on any salary deferrals made under the plan. A copy of paragraph 6801(a) is enclosed for your information. It is our view that your Plan does not meet the requirements of paragraph 6801(a) for a number of reasons. For example, the maximum deferral period of 24(1) years sets out in the Plan exceeds the maximum 6-year deferral period set out in subparagraph 6801(a)(i) of the Regulations. You may wish to redraft the Plan in a manner such that it complies with the requirements of paragraph 6801(a). We are prepared to review such a redrafted plan and offer our comments thereon.
Since your Plan does not meet the requirements of paragraph 6801(a) of the Regulations and since 19(1) became a participant in the Plan after July 27, 1986, subsection 6(11) of the Income Tax Act (the "Act") requires that he include for each of the years 1987, 1988 and 1989 the amount deferred in the particular calendar year. Subsection 6(12) of the Act requires that interest earned on the deferred amounts for each of the years 1987 through 1990 be included in his income for the calendar year in which the interest was earned. Such interest represents income from employment rather than income from property.
Plans Entered Into Before July 28, 1986
Self-funded leave plans entered into by an employee and his employer before July 28, 1986 must comply with the requirements of paragraph 6801(b) of the Regulations in order for an employee to defer taxation on any salary deferrals made under the plan. A copy of paragraph 6801(b) is enclosed for your information. Paragraph 6801(b) requires the deferrals to be for the main purpose of funding a leave of absence and to have commenced before 1987. It is our view that an employee who entered into your Plan before July 28, 1986 and who commenced to defer income before 1987 will not be taxed on the deferred amounts until such time as they are paid to him pursuant to the terms of the Plan. Interest on such deferrals may be treated in accordance with the terms of the Plan.
In paragraph 6 of the above-referenced Ruling, it is stated that unemployment insurance commission ("UIC") premiums and Canada pension plan ("CPP") payments will be based on the net salary during the deferral period and the deferred compensation amount during the leave period. Our current position is that those comments continue to apply for CPP payments but that UIC premiums should be based on the gross salary during the deferral period with no UIC premiums being payable during the leave period.
We have sent a copy of this reply to the Penticton District Taxation Office. We suggest that you contact that office should you have any further questions concerning the Plan or our comments.
Yours truly, for Director Financial Industries Division Rulings Directorate