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.
Principal Issues: 1. Will taking a paid leave under a Voluntary Exit Option program immediately after the DSLP leave period meet the condition under subparagraph 6801(a)(v)? 2. If not, what are the tax consequences?
Position: 1. No. 2. Once the employee or employer becomes aware that the DSLP rules will not be met, the arrangement ceases to be a DSLP. The arrangement should be terminated and all deferred amounts plus any unpaid interest paid to the employee within a reasonable timeframe. The amounts would be included in the employee's income for the year of receipt. If the amounts are not paid within a reasonable timeframe, the SDA rules will apply to include the amounts in the employee's income for the year the arrangement ceases to be a DSLP.
Reasons: 1. A paid leave does not constitute a return to regular employment. 2. To avoid the SDA rules, all amounts must be paid from the arrangement within a reasonable timeframe.
Author: Doiron, Wayne
Section: Regulation 6801(a)
December 8, 2020
Re: Deferred Salary Leave Plan
This is in reply to your email of November 9, 2020 in which you ask whether an employee’s participation in a Deferred Salary Leave Plan (“DSLP”) would comply with paragraph 6801(a) of the Income Tax Regulations (the “Regulations”) in the following scenario:
* An employee is currently participating in a DSLP and is scheduled to begin their six-month DSLP leave period on January 1, 2021.
* In December 2020, the employee plans to commit to participating in their employer’s newly-introduced Voluntary Exit Option (“VEO”) program.
* Instead of the employee physically returning to work after the DSLP leave period, the VEO program will provide for a paid leave of absence for the employee beginning on July 1, 2021 and ending on December 31, 2021. The employee will then retire.
This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.
A DSLP is an arrangement that permits an employee to fund, through salary deferrals, a leave of absence from their employment. Normally, deferred salary is included in income when it is earned pursuant to the salary deferral arrangement (“SDA”) provisions of the Act, even though the salary may only be received in a subsequent year. However, deferred salary under a DSLP is expressly excluded from these rules with the result that it is included in income when received rather than when earned. To qualify as a DSLP, an arrangement must satisfy the conditions set out in paragraph 6801(a) of the Regulations. In particular, subparagraph 6801(a)(v) requires that the arrangement provide for the employee to return to regular employment after the DSLP leave of absence for a period of not less than the period of the DSLP leave of absence. This condition prevents an arrangement from qualifying as a DSLP if it will be used as a pre-retirement vehicle.
The arrangement described in your scenario would not comply with the condition in subparagraph 6801(a)(v) as a paid leave of absence does not constitute a return to regular employment.
Once the employee or employer is aware that the DSLP rules will not be met, the arrangement ceases to be a DSLP. The employer should terminate the arrangement and pay all deferred amounts plus any unpaid interest under the arrangement (less applicable withholding tax) to the employee within a reasonable period of time. The amounts are included in employment income of the employee for the year of receipt. There is no additional penalty imposed by the Act in these circumstances.
Generally, we would consider 60 days to be a reasonable period of time for the employer to terminate the arrangement and pay the amounts to the employee. If the payment is not made within a reasonable period of time, the arrangement would be subject to the SDA provisions in the tax year it first became known that the arrangement no longer satisfies the DSLP rules. As a result, the amounts would be included in employment income of the employee for that year. In addition, any further amounts that are deferred and any interest accrued after that time would be included in the employee’s income for the year of deferral.
We trust our comments will be of assistance.
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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