28 March 1995 External T.I. 9504255 - SALARY DEFERRAL ARRANGEMENT

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:

Consequences where employee knows that Reg. 6801(a)(v) will not be met

Position TAKEN:

SDA rules applicable if deferred funds not paid out at the time the employee knows that Reg. 6801(a)(v) not met

Reasons FOR POSITION TAKEN:

Interpretation of the Act

		5-950425
XXXXXXXXXX		G. Martineau

Attention: XXXXXXXXXX

March 28, 1995

Dear Sir\Madam:

Re: Deferred Salary Leave Plan

This is in reply to your letter of February 2, 1995 concerning the tax consequences for an employee who would fail to return to employment after taking a leave of absence in accordance with a deferred salary leave plan if he opts for early retirement under the Nova Scotia Early Retirement Incentive Plan.

Subparagraph 6801(a)(v) of the Income Tax Act Regulations states that a deferred salary leave plan must provide that the employee return to regular employment with the employer after the leave of absence for a period equal to the leave of absence.

Where it is reasonable to assume that, after the time the arrangement is entered into, that either or both parties cannot abide by the provision, then the arrangement between the employer and the employee will fail to meet the requirements of the Income Tax Act (the "Act") to be a prescribed plan. Consequently, the employer should terminate the arrangement and all deferred amounts plus unpaid interest, if any, should be paid to the employee less the applicable withholding tax, and included in his income for the year. There is no additional penalty imposed by the Act in these circumstances.

If the arrangement is not terminated, it would be subject to the salary deferral arrangement rules in the taxation year it is known that conditions cannot be satisfied and the accumulated amount in the arrangement (deferred amounts and unpaid interest) would be taxable as employment income in that year. Furthermore, the amounts deferred and the interest accrued after the time the arrangement becomes a salary deferral arrangement are taxable in the taxation year of the deferral.

The above comments reflect an expression of opinion only and are not binding on the Department, as explained in paragraph 21 of Information Circular 70-6R2. We trust, however, that they are of assistance.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch