Financial Industries Division Peter K. Noack (613) 995-0051 July 9, 1986
Dear Sirs:
This is in reply to your letter of April 28 concerning the teachers leave plan that forms part of the collective agreement between the Board and the teachers. You wish to know whether the amendments to the Income Tax Act in respect of salary deferral arrangements announced in the Notice of Ways and Means Motion of February 26, 1986, would apply to your plan. You are also concerned about the reporting of interest earned on the funds placed with the financial institutions selected by the Administering Committee. You are referring to a ruling received from Revenue Canada in September 1980. Please, note that the letter dated September 22, 1980, was not a ruling but an informal opinion that is not binding on Revenue Canada.
The amendments announced in February have been tabled in the House of Commons on June 11 in the form of draft legislation as a Notice of Ways and Means Motion. Under a new definition to be added to subsection 248(1), a "salary deferral arrangement" will not include a prescribed plan. Draft regulations defining prescribed plans have not yet been issued. Nevertheless, in the Technical Notes to the Notice of Ways and Means Motion issued by the Department of Finance the following statement is made:
"It is intended that self-funded leave of absence arrangements established for teachers and other employees to provide for sabbaticals will also be excluded from the definition as prescribed plans."
Salary deferral arrangements as defined in the draft legislation include trusteed plans.
In question 2 of your letter you suggest a change of your leave plan to convert the plan into an "Employee benefit plan". Your present plan is a trusteed plan and, therefore, is an employee benefit plan. The terms of the plan make it quite clear that the salary deferrals during the non-leave portion of the scheme which precedes the commencement of the leave shall be placed in trust and interest shall accrue to the benefit of the trust. Control of the trust shall be vested solely in the Administering Committee. Under the terms of the plan the trust is taxable on the interest. The interest is also taxable in the hands of the teacher as employment income when the payments are received during the leave portion of the scheme. So in fact there is "double taxation" of the interest income, this is one of the drawbacks in using an employee benefit plan in the manner you are using it.
You indicate in Question 2 of your letter that it was not intended to have the leave plan qualify as an employee benefit plan. In order not to qualify as an employee benefit plan in the future, the terms of the plan must be amended to make it clear that the Board retains the salary deferrals and to delete all references to a trust.
Provided the plan is not an employee benefit plan, interest on funds administered by the Administering Committee accrued at the end of the third calendar year following the end of the calendar year in which the teacher's salary under the plan was deferred and at the end of each successive three year interval must be reported as interest income by the teacher. The teacher may elect to report accrued interest annually. The accrued interest must be reported on form T5. For example, where the year of leave is the fifth year of the scheme, interest earned on the salary deferrals retained by the Board to December 31 of the fourth year of the scheme must be reported as income by the teacher for the calendar year ended. on that December 31 provided the teacher has not elected to report the interest annually. When the teacher receives the interest as part of the payment in the year of leave, the interest will be included in the teacher's income (as interest income) to the extent it was not included in previous years.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch