🇨🇦 Canada · 5 min read · Published 2026-09-07 · Updated 2026-09-07

Written by Jordan Reeves · Editorial review: automated source and figure checks (how we check this)

Sources last verified: 2026-09-07

How Does a Deferred Salary Leave Plan Work?

You take a reduced salary for several years and receive the accumulated amount as income during a leave. The deferred portion is not taxed until it is paid, which means income moves from higher-earning years into a year with little other income.

60-SECOND ANSWER

A deferred salary leave plan shifts income from working years into a leave year, and tax follows the payment rather than the earning.

The answer:: Salary is deferred for up to six years and paid during a leave that must begin no later than the end of the sixth year.
The trap:: Leaving the employer mid-plan. The deferred amount becomes payable and is taxed in that year, defeating the purpose.
The recommendation:: Check whether the plan interacts with your pension accrual, because a leave without contributions can reduce a defined benefit pension.

Jump to the detail ↓

Where the AI summary above gets this wrong

"You can save part of your salary and pay tax on it later."

That's surface-true. Here's what it misses:

Only through a qualifying plan — Ordinary salary cannot be deferred for tax purposes. A deferred salary leave plan must meet stated conditions to work.
The leave has a deadline — The deferral period cannot exceed six years and the leave must begin immediately after it, or the whole amount becomes taxable.
Interest is taxed annually — Income earned on the deferred amounts is taxed to the employee each year, even though the salary itself is not.

→ See what a deferred amount grows to

01 How the plan is structured

The employee agrees to receive a reduced percentage of salary for a deferral period of up to six years. The withheld portion is held by the employer or a trustee and paid out as income during a leave of at least six months that must begin no later than the end of the sixth year.

The deferred salary is not included in income until it is paid, which is the whole advantage. Income earned on the deferred amounts, however, is taxable to the employee each year as it accrues.

Source: Contributing to an RRSP or PRPP

02 Why the timing produces a saving

The deferred salary is taxed in the leave year, when other employment income is usually small or absent. Moving income from a full working year into a year with little other income can drop it two brackets or more.

For a teacher, academic or public servant taking a sabbatical, that is the mechanism. It also happens to interact well with a large RRSP deduction claimed in a high-income year and used later — the timing choice is in contributing versus deducting.

WORKED EXAMPLE · Try the numbers

Shows: what an amount becomes after your chosen number of years at a fixed return. Ignores: tax, fees, inflation, and any variation in returns from year to year.

Amount today ($)

Years

Return (%/yr)

Value at the end of the period

$57,435

$10,000 left for 30 years at 6% becomes $57,435 — the growth is 83% of the total.

Source: Contributing to an RRSP or PRPP

03 What breaks the plan

Leaving the employer, or failing to take the leave within the required period, causes the deferred amount to become payable and taxable in that year. That is precisely the concentration the plan was designed to avoid.

The leave also usually suspends pension accrual and can suspend contributions to a group plan. Where the pension formula uses final average earnings, a reduced-salary period can lower the pension itself — the mechanism is in phased retirement in Canada.

Group benefits during the leave are the detail to settle in advance. Some employers continue health, dental and life coverage through a deferred leave and some require the employee to pay the premiums, and a leave arranged without checking can leave a family uninsured for a year. The terms of return to work are worth setting out in writing too, because a plan generally requires the employee to come back for a period at least equal to the leave taken.

Source: Canadian income tax rates for individuals

These plans are unusually good and almost entirely confined to the public sector, where they were negotiated decades ago. If your employer offers one and you have a use for a year off, the tax arithmetic is better than almost anything else available to an employee.