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1 |
PURPOSE
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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)".
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1.2 |
In this text, use of the masculine is generic
and applies to both men and women.
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2 |
BACKGROUND
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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.
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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.
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3
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POLICY |
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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.
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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.
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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.
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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.
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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.
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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.
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The following is an example of how to determine
if the payment qualifies as a QRLSP:
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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.
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3.2 |
Types of retroactive lump sum payments that
qualify for the tax recalculation |
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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.
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The following types of payments issued after
1994 qualify for the Federal income tax recalculation: |
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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;
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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;
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3) employment insurance and unemployment insurance
benefits;
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4) spousal or child support payments;
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5) benefits from a wage loss replacement plan
such as disability insurance plans; and
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6) benefits under the Canada Pension Plan (CPP)
or Québec Pension Plan (QPP).
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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.
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The following types of payments qualify for
the Québec income tax recalculation: |
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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;
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2) employment insurance or unemployment insurance
benefits where the payments are issued after 1991;
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3) spousal or child support payments where the
payments are issued after 1991;
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4) disability pension under the CPP or QPP where
the payments are issued after 1990;
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5) benefits under the CPP or QPP where the payments
are issued after 1991; and
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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.
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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.
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3.3 |
Statement of QRLSP |
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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: http://www.ccra-adrc.gc.ca/E/pbg/tf/t1198/
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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" for a sample of the written
statement that will be required for individuals residing in Québec.
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3.4 |
Requesting a recalculation of the previous
year(s) income tax by an individual |
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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.
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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.
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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: http://www.revenu.gouv.qc.ca/eng/formulaires/tp/tp-766_2-v.asp
.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.
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QRLSPs received prior to the year 2000 |
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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).
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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.
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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.
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4
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PROCEDURES/INSTRUCTIONS
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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.
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For taxation years prior to the year 2000, client
departments will provide the documentation upon request.
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Pension payments that qualify as a QRLSP
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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.
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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.
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If the qualifying payment was
received prior to the year 2000, pension administrators are required to
provide the appropriate documentation upon request.
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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.
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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 |
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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.
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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.
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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.
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Other QRLSPs |
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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.
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5
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INQUIRIES |
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5.1
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Any request for information regarding the foregoing
should be addressed to your PWGSC Compensation Services Office.
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