Leave of Absence: There Are Tax Consequences
A deferred salary leave plan (DSLP) permits an employee to fund, through salary deferrals, a leave of absence from their employment. Generally, salary deferrals are included in income when the amounts are earned. However, if certain conditions are met under a DSLP, the employment income is taxed when the amounts are received.
In a December 19, 2016 French Technical Interpretation, CRA opined that the requirements of a DSLP must be met when the plan is entered into and throughout the duration of the plan. One requirement is that the employee return to their employment after the leave of absence for a period that is not less than the leave period.
If, when entering into the agreement, the parties expect the employee to cease employment during the plan, it would not qualify as a DSLP. In this case, the deferred amounts would be included in the employee’s income when earned.
On the other hand, if, at the time the agreement is made, it is clear that the employee will meet all the requirements, being temporarily out of work during the period should not, in and of itself, prohibit an employee from participating in a DSLP.
Action Item: Consider a deferred salary leave plan as an option for key employees wishing to take a leave of absence.
The above information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by your qualified DJB professional.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this newsletter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents.
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