2021-0896151E5 Deferred Salary Leave Plan - Retiring After Leave

Principal Issues: What are the tax consequences if an employee retires after a period of leave under a DSLP?

Position: The arrangement would cease to be a DSLP at the time the conditions in paragraph 6801(a) are not met, with the result that any unpaid deferred salary would be included in the employee’s income at that time.

Reasons: Subparagraph 6801(a)(v) requires that the arrangement provides 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.

Author: Odubella, Darren
Section: Regulation 6801(a)

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                                                                                          2021-089615
                                                                                          D. Odubella

June 14, 2021

Dear XXXXXXXXXX:

RE: Deferred Salary Leave Plan - Retiring After Leave

We are writing in reply to your email of May 16, 2021, in which you asked whether it is permitted for an employee participating in a deferred salary leave plan (“DSLP”) to retire immediately following the leave of absence.

Our comments

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 70-6R11, 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 be in writing and satisfy the conditions set out in paragraph 6801(a) of the Income Tax Regulations (the “Regulations”). In particular, subparagraph 6801(a)(v) requires the terms of the arrangement to 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.

If it is evident that an employee had entered into an arrangement to defer salary with the intention of retiring following their leave of absence, the arrangement would not qualify as a DSLP, and the deferred salary would be taxable in the year earned rather than in the year received. In such cases, reassessments of prior year income tax returns may be required for unreported deferred salary in those prior years.

On the other hand, where an arrangement met the conditions of the Regulations at the time it was established, but, at some later time, either the employee or the employer does not abide by the conditions, the arrangement would cease to be a DSLP at that point in time. In such a case, 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. The Act imposes no additional penalty 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. However, 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.

Where an arrangement that was intended to qualify as a DSLP does not provide for all of the conditions of the Regulations in its written terms (for example, the return-to-work requirement), the arrangement would never have qualified as a DSLP and would have been subject to the SDA provisions from when it was established.

We trust our comments will be of assistance.

Yours truly,

Dave Wurtele
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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