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Sometimes I wish I were a school teacher because kids write the darnedest things. A son's friend wrote a test on ancient Egypt this month, where he stated: "Ancient Egypt was inhabited by mummies and they all wrote in Hydraulics. They lived in the Sarah Dessert and travelled by Camelot. The climate of the Sarah is such that the inhabitants have to live elsewhere." Who doesn't love humour on the job?

Teachers also have a good gig because they can take summers off, and boards of education offer teachers paid leaves of absence, while most other employers don't. Too bad, really. There's nothing to stop any employer from offering their employees a similar arrangement.

DSLP explained

Canadian income tax law contemplates the creation of a deferred-salary leave plan, or DSLP, by employers. A DSLP is a plan set up by your employer that allows you to set aside a portion of your salary each year in anticipation of taking some time off down the road.

You won't be taxed currently on that portion of your pay that's deferred. When you eventually take your leave of absence, you'll receive the deferred compensation, and you'll pay tax on the payments in the year you receive them. Hey, time off down the road and a deferral of tax today is not so bad.

DSLP details

A DSLP is a complicated system that may require professional help to set up. In order for your company's DSLP to pass muster, the plan will have to be in writing and must provide that the following criteria are met.

The main purpose of the plan is to fund a leave of absence (as opposed to providing retirement benefits);

No more than one-third of your salary may be deferred and set aside for the leave;

The leave must be for a period of at least six consecutive months (three months if the leave is for full-time attendance at a designated educational institution);

The leave must commence no later than six years after the salary deferral begins;

During the leave, no compensation other than the deferred salary may be paid, with the exception of reasonable fringe benefits;

Any investment income generated on the deferred compensation must be paid to you - the employee - annually;

Following the leave, you must return to work for a period at least as long as the leave;

Deferred amounts must be paid to you no later than Dec. 31 of the year following the year the deferral begins.

An Example

Confused? Consider an example. Suppose your employer has agreed to set up a DSLP for key employees. And you're one of them. You make $72,000 each year, but you want to set aside $10,000 annually for a leave of absence six years from now, to travel.

Let's assume that your employer starts deferring a portion of your pay on July 1, 2008. The most you'd be able to defer each year is $24,000 (one-third of your salary), so your $10,000 figure is just fine.

Your actual leave will have to commence no later than July 1, 2014 - six years from the start of your deferral period. Any investment income earned on the deferred salary will be paid to you on Dec. 31 each year, and you'll be taxed on that income.

Suppose that you begin a 12-month leave on July 1, 2014. You will have set aside $60,000 ($10,000 times six years) to finance your leave. The full $60,000, plus any accrued income on that salary, will have to be paid to you no later than Dec. 31, 2015. This shouldn't be a problem, however, because your leave is only scheduled to run for one year. If, for some reason, you're not able to take your leave as you were planning, or you postpone it, don't count on avoiding tax on your deferred salary. You'll face tax on that salary once the maximum six-year deferral period is over, even if you haven't taken your leave.

By the way, your employer will still be required to collect and remit employment insurance premiums on your gross pay (including deferred amounts). This means you won't face EI premiums when you actually take payment during your leave. Canada Pension Plan contributions work differently. There's no CPP to pay on the deferred portion of your pay, but you'll have to make these contributions when receiving your deferred salary during your leave.