2 October 2003 External T.I. 2003-0035765 - DEFERRED SALARY LEAVE 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 CCRA.

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

PRINCIPAL ISSUE :

Would the condition in subparagraph 6801(a)(v) of the Regulations be satisfied if an employee does not return to work after a period of leave but instead takes a personal leave of absence and then retires?

Position: The conditions in subparagraph 6801(a)(v) would not be met.

REASON :

An unpaid leave does not satisfy the condition in subparagraph 6801(a)(v) of the Regulations.

XXXXXXXXXX 								2003-003576
									Michelle Desrosiers,
						  			Notaire, M.Fisc.
October 2, 2003

Dear XXXXXXXXXX:

Re: Deferred Salary Leave Plan

This is in reply to your letter of July 25, 2003 in which you request clarification on a Deferred Salary Leave Plan ("DSLP"). Your question deals with a situation where an employee approaching the end of a period of absence under a DLSP, requests a one year period of absence due to personal reasons. The leave of absence is granted and commences on the day he would have returned to active duty from the period of absence. At the end of the personal leave of absence, the employee announces he wishes to retire. You would like to know if the period of absence due to personal reasons can count as the year of "return to work" required under the deferred salary leave rules.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. For more information concerning advance tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. Copies of information circulars and other publications are available at your local Tax Services Offices or on the Internet at http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments, which may be of assistance.

A DSLP is a plan or arrangement that permits an employee to fund, through salary deferrals, a leave of absence from his or her employment. Generally, salary deferrals are included in income on an accrual basis pursuant to the salary deferral arrangement ("SDA") provisions in the Income Tax Act (the "Act") notwithstanding that the cash may only be received in a subsequent year. However, there is an exclusion from these rules for DSLPs. In these cases, the salary deferrals are in fact taxed when received, and not when earned.

Paragraph 6801(a) of the Income Tax Regulations (the "Regulations") sets out the rules governing DSLPs. Subparagraph 6801(a)(v) of the Regulations, in particular, requires a DSLP to provide that an "employee is to return to his regular employment with the employer or an employer that participates in the same or a similar arrangement after the leave of absence for a period that is not less than the period of the leave of absence".

The purpose of the provision, in general, contemplates a period of leave of absence from work, followed by a return to work and not a subsequent retirement or absence from work. Consequently, even though an employee may be considered employed when they are on unpaid leave, we would not consider such unpaid leave to be a return to regular employment as required under subparagraph 6801(a)(v) of the Regulations. In our view, if at the time the arrangement is made, the employee does not intend to return to work for a period of time at least equivalent to the leave of absence, any amounts deferred under the plan would be included in income in the years in which the deferrals occurred.

On the other hand, it should also be noted that where an arrangement meets the provisions of the Regulations at the time it is established, but, at some later time, either the employee or the employer does not abide by the provisions, then it may be appropriate to conclude that the arrangement has ceased to meet the requirements of the Regulations at that point in time. Generally, when this happens, the employer should terminate the arrangement and pay all remaining funds held for the benefit of the employee to him or her, less any applicable withholding tax. If the arrangement is not terminated, it would be subject to the SDA rules in the taxation year it is known that conditions cannot be satisfied and the accumulated amount in the arrangement would be taxable employment income in that year. In addition, any further amounts that are deferred and any interest accrued after the time the arrangement becomes an SDA are taxable in the year of deferral.

Note that where the decision to not return to work results in the arrangement being terminated at a point in time at which all amounts held under the DSLP have already been paid to the employee, there will be no further tax consequences.

We trust that the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate