4 April 2011 External T.I. 2010-0387161E5 - 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.

Principal Issues: Whether any part of an employee bonus deferred by an employer over a period greater than 3 years, meets the requirement of paragraph (k) of the definition of "salary deferral arrangement" in subsection 248(1) of the Income Tax Act?

Position: No.

Reasons: Paragraph (k) of the definition of "salary deferral arrangement" requires that the amount must be paid within 3 years following the end of the year in which the services were rendered.

XXXXXXXXXX 2010-038716 Gillian Godson April 4, 2011

Re: Salary Deferral Arrangement

This is in response to your letter dated November 15, 2010, wherein you requested clarification regarding the taxation of an employee bonus.

As outlined in your incoming letter, you have described a hypothetical situation in which a corporation awards a bonus of $100 to an employee for services rendered by the employee for the year, which will be paid to the employee in payments of $20 each year for a period of five consecutive years after the year the services are rendered. You have requested clarification on whether the portion of the deferred bonus paid within three years following the end of the year the services are rendered, would meet the requirements of the exemption provided by paragraph (k) of the definition of "salary deferral arrangement" ("SDA") in section 248 of the Income Tax Act (the "Act").

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

Paragraph (k) of the definition of an SDA provides for a specific plan or arrangement which is excluded from the SDA definition. For a plan or arrangement to qualify under paragraph (k), a taxpayer who has a right to receive a bonus or similar payment in respect of services rendered by the taxpayer in a taxation year has to be paid the bonus or similar payment within 3 years following the end of the year in which the services were rendered.

It is our view that in circumstance such as the one you describe, where part of a deferred employee bonus is paid within the 3 year time frame, and part of the bonus is paid outside the 3 year time frame, the full amount of the bonus would be viewed as not meeting the requirements of paragraph (k) of the definition of an SDA in subsection 248(1) of the Act.

We trust that these comments will be of assistance.

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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