16 March 2000 External T.I. 2000-0002765 - US NON-QUALIFIED DEFERRED COMPENSATION PLAN

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether U.S. non-qualified deferred compensation plan will be a salary deferral arrangement

Position: Probably, but will always be a question of fact,

Reasons: The plan must have as one of its main purposes the deferral of tax under the Act.

XXXXXXXXXX 		2000-000276
S. E. Thomson
Attention:  XXXXXXXXXX 

March 16, 2000

Dear XXXXXXXXXX:

Re: U.S. profit incentive plan as a salary deferral arrangement

This is in reply to your letter of January 13, 2000 in which you outline a scenario regarding a U.S. profit incentive plan, and ask for our opinion on whether or not the plan will be a salary deferral arrangement (SDA), as that term is defined in subsection 248(1) of the Income Tax Act. We also acknowledge subsequent conversations with XXXXXXXXXX of your office.

Although you have asked for our technical interpretation, it appears that your request involves a transaction or series of transactions contemplated by a specific taxpayer. We are unable to comment other than in the context of an advance income tax ruling. We refer you to Information Circular 70-6R3 "Advance Income Tax Rulings", which is available at our website at http://www.ccra-adrc.gc.ca. However, we are able to offer the following general comments on the relevant provision of the Income Tax Act, which may apply. Please note that these comments are general in nature, and may or may not apply in your situation. As such, these comments are not binding on the Canada Customs and Revenue Agency (the "CCRA").

In your letter, you explain that a U.S. corporation has a profit incentive plan in place for certain senior U.S. employees and an employee of a Canadian subsidiary under which the employees may defer certain amounts of pay and bonus.

We understand that the plan in question is commonly known in the U.S. as a "non-qualified deferred compensation plan". We understand that under the U.S. rules, the amount will not be currently taxable to the employee under the doctrine of "constructive receipt" if the agreement was entered into before the services were rendered.

Whether or not such a plan is an SDA for a Canadian-resident employee is a question of fact, to be determined on a case-by-case basis.

Regardless of the U.S. rules, a plan will be an SDA under the Act where a person has a right in a taxation year to receive an amount after the year, and it is reasonable to consider that one of the main purposes for the creation or existence of the right is to postpone tax payable under the Act by the taxpayer in respect of an amount that is, or is on account or in lieu of, salary or wages of the taxpayer for services rendered by the taxpayer in the year or a preceding taxation year. This is so even if the right is subject to one or more conditions, unless there is a substantial risk that any one of those conditions will not be satisfied.

Note that postponement of tax does not have to be the main purpose of the plan, it merely has to be one of the main purposes. Further, conditions such as a requirement for continuing employment are generally ignored in determining whether a plan or arrangement is an SDA.

Certain arrangements which may otherwise be SDAs are exempt from the SDA rules. These exceptions are set out in paragraphs (a) to (k) of the definition of salary deferral arrangement in subsection 248(1) of the Act, and, for purpose of paragraph (l) of the definition, as prescribed by section 6801 of the Income Tax Regulations. One of those exceptions allows for the deferral of a bonus, where the plan provides that the bonus will be paid within 3 years following the end of the year.

Pursuant to subsection 6(13) of the Act, the employee may be exempt from the SDA rules if the employee was a member of the plan prior to establishing residence in Canada, and the employee was not a resident for more than 36 of the preceding 72 months.

Where an employee has a right to an amount but elects not to receive it, and the amount did not accrue under one of the exempted arrangements or plans described above, the amount will be taxable to the employee in the year under subsection 6(11) of the Act. In addition, any interest (or other additional amount) accruing with respect to the deferred amount will be taxable in the year by virtue of subsection 6(12) of the Act.

We trust that the above comments will provide some assistance.

Yours truly,

P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate