ARCHIVED CD 2000-029

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October 31, 2000

SUBJECT: Federal and Québec Income Tax--QRLSP

1. PURPOSE

1.1 The purpose of this directive is to provide Compensation Advisors in departments with information concerning a change to the tax treatment of certain types of retroactive payments. These types of retroactive payments are identified as "qualifying retroactive lump sum payments (QRLSP)".

1.2 In this text, use of the masculine is generic and applies to both men and women.

2. BACKGROUND

2.1 Income from various sources is taxable in the year in which it is received. As a result, individuals are taxed on retroactive lump sum payments in the year in which these are received, even though a significant portion of the payment may relate to a prior year(s). When this occurs, it could cause an individual's tax liability on retroactive lump sum payments to be higher than it would have been if the payments had been made in the year(s) to which it relates.

The 1999 Federal budget introduced legislation similar to the 1996 Québec Budget whereby a QRLSP may be taxed in the year that it relates to instead of the year in which the payment was received.

3. POLICY

3.1 A QRLSP is the portion of a lump sum payment received in a year that relates to one or more preceding years throughout which the individual was a resident of Canada. Please note that it is Canada Customs and Revenue Agency's (CCRA) responsibility to determine whether or not the individual was a "resident" or "non-resident" of Canada for the purpose of the QRLSP. To qualify for a QRLSP, the payment must be one of the types identified in subsection 3.2 of this directive.

An individual who received a QRLSP will be able to request from CCRA and from the Ministère du Revenu du Québec (MRQ) a recalculation of his income tax for the previous year(s) to which the payment relates.

While the total amount of the lump sum payment is to be included in the income tax return for the year in which the payment was received, the recalculation will determine the tax liability as if the payment had been taxed in the year it relates, rather than taxed in the year in which it was received. CCRA and the MRQ will apply the recalculation where it is determined that the recalculation is advantageous to the individual.

To qualify for the recalculation of Federal income tax, the payment must have been issued after 1994 and the total amount of the retroactive portion of the payment must be at least $3,000.

To qualify for the recalculation of Québec income tax, the payment must have been issued after 1993 and the total amount of the retroactive portion of the payment must be at least $300. Please note that some types of payments issued after 1990 may also qualify for the Québec income tax recalculation. These types of payments are identified in subsection 3.2 of this directive.

To request a recalculation of Québec income tax, the individual must be a resident of Québec as of December 31st of the taxation year in which the retroactive payment was received.

The following is an example of how to determine if the payment qualifies as a QRLSP:

A payment of $4,000 is issued in the year 2000. From this payment, $1,300 is related to the year 2000, $1,700 is related to the year 1999 and $1,000 is related to the year 1998. The total of the retroactive portion is $2,700 ($1,700 + $1,000). Therefore, this payment will not qualify for the recalculation of the Federal income tax as the amount is less than $3,000. However, it will qualify for a recalculation of the Québec income tax (if the employee is residing in Québec) as the amount exceeds $300.

3.2 Types of retroactive lump sum payments that qualify for the tax recalculation

Only certain types of retroactive payments qualify for the recalculation of the individual's income tax, and these types differ between CCRA and the MRQ.

The following types of payments issued after 1994 qualify for the Federal income tax recalculation:

  1. employment income payments, if they are received under a court judgment, an agreement to terminate a lawsuit, or under an arbitration award (other than as a result of arbitration under normal collective bargaining) such as pay equity;
  2. periodic pension benefits such as retroactive adjustments due to the recalculation of previous periodic monthly payments and retroactive pension payments due to the monthly payments being commenced late;
  3. employment insurance and unemployment insurance benefits;
  4. spousal or child support payments;
  5. benefits from a wage loss replacement plan such as disability insurance plans; and
  6. benefits under the Canada Pension Plan (CPP) or Québec Pension Plan (QPP).

Please note that interest paid on any of the above types of payments does not qualify as a QRLSP as it is not eligible for the recalculation of the Federal tax.

The following types of payments qualify for the Québec income tax recalculation:

  1. employment income payments where the payments are issued after 1993, if they are received under a court judgment, an agreement to terminate a lawsuit, or under an arbitration award (other than as a result of arbitration under normal collecting bargaining) such as pay equity;
  2. employment insurance or unemployment insurance benefits where the payments are issued after 1991;
  3. spousal or child support payments where the payments are issued after 1991;
  4. disability pension under the CPP or QPP where the payments are issued after 1990;
  5. benefits under the CPP or QPP where the payments are issued after 1991; and
  6. any other amount paid after 1991 other than employment income that would be, in the opinion of the Minister, an undue additional tax burden on the individual if it was to be included in computing income for the year in which it is received, such as pension benefits or interest on any type of payment.

Please note that interest paid on any of the above types of payments qualifies as a QRLSP and is eligible for the recalculation of the Québec income tax. However, the MRQ requests that the interest part of the payment be identified separately from the principal.

3.3. Statement of QRLSP

Client departments and pension administrators will be required to complete the "Statement of Qualifying Retroactive Lump-Sum Payment" (T1198 E), which should be used by individuals to request a recalculation of the Federal income tax that was deducted from the lump sum payment. This form is available from CCRA Tax Services Offices and at the following Internet address: T1198

In addition, the client departments and pension administrators will be requested to issue a written statement for individuals residing in Québec to allow them to request the recalculation of their Québec income tax. The statement should identify the individual's name, social insurance number (SIN), the year in which the payment was issued, the total amount of the qualifying payment, the description of the payment and the amounts related to each year. Please note that if there is interest, the interest portion of the payment is to be identified separately from the principal and reported for each year of retroactivity. Please refer to Appendix A - Sample letter for a sample of the written statement that will be required for individuals residing in Québec.

3.4 Requesting a recalculation of the previous year(s) income tax by an individual

An individual who received a QRLSP will be able to request a recalculation of his income tax for the previous year(s) from CCRA and from the MRQ. The recalculation will determine the tax liability on the QRLSP as if each portion had been taxed in the year to which it relates rather than taxed in the year in which it was received. CCRA and the MRQ will apply the tax calculation that is most advantageous to the individual.

To request a recalculation of the Federal income tax, the individual will attach the completed T1198 E to his income tax return for the year in which the retroactive lump sum payment is received.

To request a recalculation of the Québec income tax, residents of Québec will have to check the appropriate box on their income tax return (box 404 for the year 2000) and complete the form "Averaging of a Retroactive Payment or Support-Payment Arrears" (TP-766.2-V) which can be found at the following Internet address: Revenu Québec.The completed TP-766.2-V as well as the written statement from the client department or pension administrator should accompany the individual's income tax return for the year in which the retroactive lump sum payment is received.

QRLSPs received prior to the year 2000

If an individual received a QRLSP in a year prior to the year 2000 and has not requested a recalculation from CCRA or the MRQ, he may do so now. He will need to obtain the proper documentation from the client department or pension administrator (T1198 E and/or the written statement as applicable).

The request to recalculate the Federal income tax must be made in writing to CCRA, and a copy of the T1198 E must accompany the written request. This documentation is to be sent to the individual's regional CCRA Tax Centre separately from their income tax return.

To request a recalculation of Québec income tax for a QRLSP that was received prior to the year 2000, the individual must contact their regional MRQ office for instructions.

4. PROCEDURES/INSTRUCTIONS

4.1 The historical records in the Regional Pay System (RPS) do not include the pertinent information to automatically produce the T1198 E and/or the written statement required to request a recalculation of the Federal and Québec income tax. Effective taxation year 2000, client departments will be responsible for completing and providing the T1198 E and/or the written statement as applicable. It is suggested that this documentation be provided to employees at the same time as the remuneration statements (T4, Relevé 1) are provided.

For taxation years prior to the year 2000, client departments will provide the documentation upon request.


Pension payments that qualify as a QRLSP

Pension administrators are required to provide pensioners who received a retroactive payment of a monthly pension benefit, or an adjustment due to the recalculation of previous monthly payments, with the form T1198 E for the recalculation of the Federal income tax.

In addition, a retroactive adjustment to any pension payment, (whether it be a monthly pension payment or a lump sum pension payment such as a Transfer Value), plus the interest on these payments may qualify for the Québec income tax recalculation. These payments may qualify if they would, in the opinion of the MRQ, create an undue additional tax burden for the individual if the amount was to be included in his income for the year in which it is received. In this case, the pension administrator will also be required to provide the pensioner with a written statement for the recalculation of the Québec income tax.

If the qualifying payment was received prior to the year 2000, pension administrators are required to provide the appropriate documentation upon request.

It is anticipated that, for pensioners subject to the Public Service Superannuation Act (PSSA), the pension system will automatically issue a Statement of QRLSP for all qualifying retroactive adjustments to pension payments received in the year 2001 and future years, which will replace the T1198 E and/or the written statement. Further details will be made available via the Superannuation Administration Manual (SAM) once they are known.

Pay Equity Agreement between the Public Service Alliance of Canada (PSAC) and the Treasury Board Secretariat (TBS), and the Pay Equity Agreement between the PE National Assembly (PENA) and TBS

The Pay Equity agreement qualifies for the tax recalculation of the Federal and Québec income tax. In addition, the interest portion of the Pay Equity agreement qualifies for the recalculation of the Québec income tax. Please note that adjustments to allowances due to pay equity such as: retiring allowances, extra duty pay, maternity leave allowance etc. qualify as a QRLSP. Payments that qualify as a QRLSP are to be allocated to the year in which the original payment was issued.

Example

A retiring allowance of $20,000 was received in the year 1995. Due to pay equity, the retiring allowance was revised to $23,000. Therefore, an additional payment of $3,000 is issued in the year 2000. This payment will be allocated to the year 1995 for the tax recalculation.

The RPS will be programmed to automatically issue a statement of QRLSP for all PENA and PSAC pay equity payments. One statement will be produced per individual, with a cumulative total of all of the PENA and PSAC pay equity retroactive adjustments that were received in the same taxation year. Public Works and Government Services Canada (PWGSC) has created a statement that will replace the T1198 E and/or the written statement for Québec as applicable. This statement will also replace the TP-766.2-V that the employee would have to complete if he is a resident of Québec. PWGSC will produce this statement for all employees and former employees who received a Pay Equity payment in the taxation year 2000 regardless of the amount (i.e. a statement will be produced even though the payment may not meet the $3000 [Federal] or $300 [Québec] criteria). This statement will be used to request a recalculation of both the Federal income tax and Québec income tax, and will provide the yearly breakdown of all pay equity adjustments paid to individuals for the year 1985 up to and including the year 2000, and the yearly breakdown of interest whether the individual is a resident of Québec or not.

Other QRLSPs

Where QRLSPs relating to employment insurance and unemployment insurance, disability insurance plans or CPP or QPP benefits qualify for the tax recalculation, the administrator of the particular plan will be responsible for completing the appropriate documentation.

5. INQUIRIES

5.1 Any request for information regarding the foregoing should be addressed to your PWGSC Compensation Services Office.



Original Signed by
R. Jolicoeur

R. Jolicoeur
Director General
Compensation Sector
Government Operational Service

Reference: 9007-8