2012-0451771R3 Deferred Salary Leave Plan (DSLP) - ITR 6801(a)

Principal Issues: Does the proposed Plan (a self-funded sabbatical program) qualify as a prescribed plan or arrangement pursuant to paragraph 6801(a) of the Income Tax Regulations?

Position: Yes.

Reasons: The legislation and regulation.

Author: XXXXXXXXXX
Section: ITR 6801(a)

XXXXXXXXXX
                                                                                                                                       2012-045177

XXXXXXXXXX, 2013

Dear XXXXXXXXXX,

RE: Advance Income Tax Ruling – XXXXXXXXXX (“Corporations”)

This is in reply to your correspondence dated XXXXXXXXXX and our various telephone conversations (XXXXXXXXXX), in which you requested an advance income tax ruling for the above-referenced Corporations. 

This letter is based solely on the facts and proposed Plan described below. Any documentation submitted in respect of your request does not form part of the facts and proposed Plan and any references thereto are provided solely for the convenience of the reader.
We understand that, to the best of your knowledge and that of the above-referenced Corporations, none of the issues involved in the ruling request is:

(i)   in an earlier return of any of the Corporations or a related person,
(ii)  being considered by a tax services office or tax centre in connection with a previously filed tax return of any of the Corporations or a related
person,
(iii) under objection by any of the Corporations or a related person,
(iv)  before the courts, nor
(v)   the subject of a ruling previously considered by the Directorate.

Our understanding of the facts, the proposed Plan and the purpose of the proposed Plan is as follows:

Definitions

In this letter, the following terms have the meanings specified below:
“Banking Years” means the XXXXXXXXXX consecutive Years commencing on the Commencement Date;
“Base Salary” means gross income, based upon standard hours for the specific job classification, excluding relief pay, overtime, and all premiums and allowances;
“Commencement Date” means the effective date of the Plan Agreement;
“Corporate Statute” means XXXXXXXXXX;
XXXXXXXXXX;
“Employer” means Subco1, Subco2 or Subco3, as the case may be, each of which is a wholly-owned subsidiary of Parentco;
“Interest Rate” means the Prime Business Rate published on the Bank of Canada website less XXXXXXXXXX per cent, updated quarterly for each quarter during which the Sabbatical Fund exists. The Interest Rate would never be less than XXXXXXXXXX%;
“Participant” means a regular full-time employee of the Employer;

“Plan” means the plan described in 8 through 23 below;

“Parentco” means XXXXXXXXXX, a corporation with share capital incorporated under, and governed by, the provisions of the Corporate Statute;
“Plan Agreement” means a Plan agreement entered into by the Participant and their Employer;
XXXXXXXXXX;
“Regulations” means the Income Tax Regulations, C.R.C., c. 945, as amended;

“Sabbatical Fund” means the monies withheld and accumulated during the Banking Years for the Participant’s benefit;
“Sabbatical Year” means the Year commencing on the day immediately following the XXXXXXXXXX anniversary of the Commencement Date;
“Subco1” means XXXXXXXXXX, a corporation with share capital incorporated under, and governed by, the provisions of the Corporate Statute, all of the issued and outstanding shares of which are owned by Parentco;
“Subco2” means XXXXXXXXXX, a corporation with share capital incorporated under, and governed by, the provisions of the Corporate Statute, all of the issued and outstanding shares of which are owned by Parentco;
“Subco3” means XXXXXXXXXX, a corporation with share capital incorporated under, and governed by, the provisions of the Corporate Statute, all of the issued and outstanding shares of which are owned by Parentco;
“Year” means XXXXXXXXXX consecutive weeks.
Unless otherwise stated, all references to a statute are to the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.

Facts
1.    Parentco is a corporation XXXXXXXXXX. Parentco is principally a holding corporation, owning shares in a number of wholly-owned subsidiaries which carry on XXXXXXXXXX businesses.
2.    All of the issued and outstanding shares of Parentco are held by XXXXXXXXXX.
3.    Subco1 carries on the XXXXXXXXXX business in XXXXXXXXXX.  Subco1’s Business Number is XXXXXXXXXX.
4.    XXXXXXXXXX.
5.    XXXXXXXXXX.
6.    XXXXXXXXXX.

Proposed Plan
7.    The Plan is a self-funded sabbatical program that is being implemented pursuant to Item XXXXXXXXXX of the Memorandum of Agreement (“Collective Agreement’) dated XXXXXXXXXX, between Parentco and the XXXXXXXXXX (the “Bargaining Agent”).  
8.    During the Banking Years, a Participant will receive compensation on the basis of XXXXXXXXXX% of his or her Base Salary plus XXXXXXXXXX% of applicable overtime, premiums and allowances, less deductions and withholdings as required by law and by the Collective Agreement. Vacation and statutory benefits will be calculated on the basis of XXXXXXXXXX% of the Participant’s Base Salary plus XXXXXXXXXX% of applicable overtime, premiums and allowances.
9.    The Employer will withhold XXXXXXXXXX% of the Participant’s Base Salary and will maintain this amount in a Sabbatical Fund for the Participant’s benefit. The Sabbatical Fund will bear interest at the Interest Rate and such interest will be reported annually by the Employer on the Participant’s T4 slip, as employment income. The interest earned on the Sabbatical Fund to the end of XXXXXXXXXX of every calendar year will be paid to the Participant no later than XXXXXXXXXX of that calendar year and shall be subject to all deductions or withholdings required by law and by the Collective Agreement.
10.   During the Sabbatical Year,

(a) the Participant will be on a leave of absence from the Employer and shall receive as compensation the monies accumulated in the Sabbatical Fund, plus interest (calculated at the Interest Rate) not yet paid to the Participant and shall be subject to all deductions and withholdings required by law and by the Collective Agreement, and any other deductions agreed to by the Participant; and
(b) other than the amounts paid to the Participant under (a) above, he or she will not receive any salary or wages from either the Employer or a person or partnership with whom the Employer does not deal at arm’s length, except for reasonable fringe benefits that the Employer usually pays to or on behalf of its employees, but only to the extent provided in the Plan Agreement.
11.   At least XXXXXXXXXX days prior to commencement of the Sabbatical Year, the Participant will elect one of the following methods of payment for the monies accumulated in the Sabbatical Fund. If no such election is made, the Participant shall be deemed to have elected option (a) below:
(a) payment, less applicable deductions and withholdings required by law or otherwise, in one lump sum payment at the beginning of the Sabbatical Year; or
(b) payment made on a weekly basis in the form of XXXXXXXXXX equal payments beginning as soon as possible after the commencement of the Sabbatical Year, less applicable deductions and withholdings required by law or otherwise.

12. After there has been an election as to either of the above options, no subsequent election may be made without the Employer’s approval.

13.  All amounts in the Sabbatical Fund, plus interest calculated at the Interest Rate, but not yet paid to the Participant, will be paid to the Participant no later than XXXXXXXXXX of the XXXXXXXXXX calendar year commencing after the end of the Banking Years.

14. During the Sabbatical Year, the Participant may not be declared surplus. Upon completion of the Sabbatical Year:

(a)   subject to (b), (c) and (d) and 15, 16, 17 and 19  below, the Participant must return to work for the Employer, as a regular Participant for at least the same number of base hours as he or she worked prior to the Sabbatical Year, for a period no less than the duration of the Sabbatical Year;

(b)   if the Participant’s position immediately prior to the Sabbatical Year still exists and has not been filled or has been filled temporarily, the Participant shall return to that position;

(c)   if the Participant’s position immediately prior to the Sabbatical Year no longer exists or has been filled permanently, the Employer will place the Participant in a position at the same salary grade and same location as the Participant’s position immediately prior to the Sabbatical Year; and

(d)   if the surplus staff procedure under the Collective Agreement has been triggered during the Sabbatical Year, the Participant will be redeployed, laid off or terminated after the Sabbatical Year in accordance with the Collective Agreement. 

15. A Participant who ceases to be employed by the Employer for any reason, including, but not limited to, termination for cause during the term of the Plan Agreement, shall be deemed to have withdrawn from the Plan on the date that he or she ceases to be a Participant, and the Employer will pay to the Participant the Sabbatical Fund within XXXXXXXXXX days after the deemed withdrawal date, plus interest at the Interest Rate.

16. In extenuating circumstances, such as financial hardship (but not including a serious illness, which is dealt with in 19 below), and provided that the Participant obtains the Employer’s written consent, the Participant may withdraw from the Plan. The Participant is to provide the Employer with written notice of that intent to withdraw. The written notice must be provided to the Employer at least XXXXXXXXXX months before the commencement of the Sabbatical Year. The Employer will not give the consent unless the Employer has reasonable grounds, having regard to the provisions of paragraph 6801(a) of the Regulations, to believe that the circumstances in support of the withdrawal are sufficiently extenuating.  Within XXXXXXXXXX days after such withdrawal, the Employer will pay the Sabbatical Fund to the Participant, less deductions and withholdings required by law and by the Collective Agreement, plus interest at the Interest Rate.
17.   If the Participant dies while funds remain in the Sabbatical Fund, the Employer shall pay the Sabbatical Fund, less deductions and withholdings required by law and by the Collective Agreement, plus interest at the Interest Rate, to the Participant’s estate within XXXXXXXXXX days after the Employer has received written notification of the death or XXXXXXXXXX days after the date that the Employer has received the necessary clearances and proofs normally required for payment to estates, whichever event occurs later.
18.   During the Sabbatical Year, the Participant’s entitlement to group life coverage, living benefit and access to spousal life insurance will continue, subject to the terms of the Collective Agreement in effect during the Sabbatical Year. The Participant has the option of maintaining, through the Employer, extended health benefits, dental plan and supplemental term life insurance and spousal child/life coverage by the Participant’s pre-payment, to the Employer prior to commencement of the Sabbatical Year, of XXXXXXXXXX% of the applicable premiums in one lump sum.
19.   During the Sabbatical Year, the Participant will not be eligible for long-term disability or sick leave benefits, nor will the Participant earn or otherwise become entitled to any vacation benefits or compensation in lieu of vacation or statutory holiday entitlement. Notwithstanding the foregoing, if the Participant becomes, during the Sabbatical Year, seriously ill, the Participant must inform his union and the Employer’s Labour Relations Department. The Employer will then, on a case-by-case basis and if the Participant so requests, have the discretion to permit the Participant to withdraw from the Plan, provided that the Employer will not give the permission unless the Employer has reasonable grounds, having regard to the provisions of paragraph 6801(a) of the Regulations, to believe that the circumstances in support of the withdrawal are sufficiently extenuating.  If the withdrawal occurs, the Employer shall pay the Sabbatical Fund, less deductions and withholdings required by law and by the Collective Agreement, plus interest at the Interest Rate, to the Participant within XXXXXXXXXX days after the date of withdrawal. 
20.   During the Sabbatical Year, the Participant will remain subject to the rules and policies of the Employer and of the Collective Agreement in effect at that time. Upon completion by the Participant of the Sabbatical Year, and his or her return to a regular full-time position with the Employer, the accumulation and re-accumulation dates for sick leave shall be adjusted in accordance with corporate policies in existence upon the return to a regular full-time position and in accordance with the Collective Agreement at that time. Vacation and floating holiday entitlement will be prorated for the year of the return, and the effective commencement date and vacation commencement date will be readjusted to reflect the absence during the Sabbatical Year.
21.   Upon completion of the Sabbatical Year, the Participant will have the right to contribute to the pension plan the amount that he or she could have contributed if he or she had remained on payroll at XXXXXXXXXX% of his or her base earnings during the Sabbatical Year. If the Participant uses such right, the period of time during the Sabbatical Year shall be included in calculating his or her continuous employment or established service, as the case may be.

PURPOSE OF THE PROPOSED PLAN
The purpose of the proposed transaction is to provide the employees of the Employer with the opportunity to finance a self-funded sabbatical program by deferring portions of their regular salary to finance the Sabbatical Year. 

RULING GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed Plan and the purpose of the proposed Plan, and provided that the features of the Plan are as described above and that the Plan is implemented as described above, we rule as follows:

The Plan will not constitute a salary deferral arrangement, as that term is defined in subsection 248(1) of the Act, by virtue of the Plan qualifying as a prescribed plan or arrangement pursuant to paragraph 6801(a) of the Regulations.

Comments:

The above advance income tax ruling is based on the Act and the Regulations in their present form and does not take into account any proposed amendments thereto, and is given subject to the general limitations and qualifications set out in Information Circular IC 70-6R5, dated May 17, 2002, and is binding on the Canada Revenue Agency provided that the proposed Plan is implemented before XXXXXXXXXX.

The above ruling is based solely on the facts and proposed Plan described above. The documentation submitted with your request does not form part of the facts and proposed Plan. Any references to the documentation are provided solely for the convenience of the reader.

Yours truly,

For Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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