XXXX
F. Francis (613)957-3498
January 21, 1988
Dear Sirs:
Re: Deferred Salary Leave Plan XXXX (the "Plan")
This is in reply to your letter of January 5, 1988, wherein you requested our opinion with respect to the proposed Plan.
As noted in our Information Circular 70-6R, we do not express opinions on specific proposed transactions other than as a reply to a request for an advance income tax ruling. As a consequence thereof, we may only offer the following general comments.
A Plan like yours would ordinarily be considered to be a "salary deferral arrangement" as that term is defined pursuant to subsection 248(1) of the Income Tax Act (the "Act"), unless it qualifies as a prescribed plan in accordance with the Draft Income Tax Regulations 6801 (the "Regulations").
We have noted the following deficiencies in the Plan which should be amended to ensure that the Plan complies with the Draft Regulations:
1) Pursuant to paragraph 6.1 of the Plan, the deferred salary amounts will be placed in trust with a Trust Company, and will be invested and administered by the designated Trust Company. Paragraph 5.2 and 5.3 of the Plan should be clarified to specify that income of the trust for a taxation year that has been earned by it for the benefit of the employee is paid or payable in the year to the employee.
2) The Plan must provide that, in the event the employee does not take his leave of absence in the designated period, the deferred amount will be paid to him in the first taxation year that commences after the end of the deferral period.
3) Paragraph 9.2 of the Plan gives the employee the right to withdraw from the Plan at any time provided that the employer is notified within a prescribed time period. Since this paragraph empowers the employee to have access to his contributions at any time, it is our view that the funds may be considered to be constructively received at the time of deferral. As a consequence thereof, the Plan should be amended to accord the employee the right to withdraw funds only in the case of financial hardship (unless paragraph 9.1) of the Plan applies).
The above comments are an expression of opinion only and are not binding on the Department. They are, however, our best interpretation of the relevant proposed legislation as it would apply generally if enacted into law substantially as presently worded.
We trust the foregoing is of assistance.
Yours truly,
for Director Financial Industries Division Rulings Directorate