Minister may grant relief from penalty or interest

IV. How WAS the QRLSP mechanism TO FUNCTION?


[21] As proposed in the budget, the mechanism provided for a special "notional tax" calculation to be made by allocating the qualifying lump-sums retroactively to the years to which they relate and calculating the notional additional tax for those years. However, the notional tax was not just comprised of the tax that would have been payable in those years. It was also to include an interest amount to reflect the delay in payment of tax on the retroactive lump-sum payment. The Budget Plan had noted that governments incurred financing costs when they received tax revenues later than if the payment had been made earlier, when due.


[22] This interest component of the notional tax was to be calculated using the prescribed interest rates for tax refunds, i.e. the interest rate paid by the Minister when refunding tax to a taxpayer. Since October 1, 1989, the prescribed rate for refunds under the ITA has been calculated as the 90-day Treasury Bill rate plus two percent (Income Tax Regulations, C.R.C., c. 945, s. 4301). Since January 1, 1987, interest has been computed on a daily compounded basis (ss. 164 and 248(11) of the ITA).


[23] On September 10, 1999, the draft legislation amending the ITA that included the provisions relating to the QRLSP was tabled (Bill C-25). The provisions came into force on June 29, 2000 (ss. 110.2 and 120.31, the full texts of which I have attached to the present decision as Schedule 1). The provisions as enacted had no material differences from the proposals in the 1999 budget. The CRA had identified one obvious drafting error in how the calculation would be performed that was clearly inconsistent with the budget proposal. The CRA brought the error to the attention of the Finance Department, which in turn confirmed that the CRA's observation was correct. The CRA has consequently applied the provisions in the "corrected" fashion, although Parliament has yet to amend the provision to rectify the error.


[24] Ms. Jaekl testified that when the budget was first presented in Parliament in February 1999, she became aware of the proposed QRLSP mechanism, but did not learn about or inquire into any of its details. She knew from experience that merely because a proposal is announced in Parliament does not necessarily mean it will ultimately be passed into law. She understood, however, that if the mechanism was implemented, it had the potential to benefit pay equity recipients. She only acquired a more fulsome understanding of the QRLSP during a conference that she attended in Halifax on March 8, 2000, at which one of the speakers had provided a detailed explanation of how the mechanism would work. This conference took place over four months after the PSAC and the Treasury Board had negotiated the settlement of the Section 11 Complaints.


[25] No evidence was adduced indicating that Ms. Murphy or any representative of the PSAC had contacted the CRA prior to signing the pay equity settlement to obtain details about the QRLSP mechanism nor that anyone had contacted the Finance Department or other government representatives to request or lobby for any change in regard to how the mechanism would function.

propat

V. How has the CRA administered the QRLSP?


[26] Ever since the QRLSP provisions came into force, taxpayers who have been in receipt of qualifying lump-sums have been able to apply to the CRA to learn if they can benefit from this tax relief. Sheila Barnard is the manager of the legislation section in the Individual Returns and Payments Processing Directorate of the CRA, which is responsible for establishing the processes involved in assessing personal income tax. She pointed out that the QRLSP provision enabled taxpayers to allocate their qualifying lump sums as far back as 1978. The CRA recognized that few people keep their tax records for so many years and that the agency, on the other hand, possessed that data in its computer system.


[27] The CRA was therefore in a position to perform the QRLSP calculation for taxpayers and established a process to achieve that result. It developed a special form (T1198), which taxpayers could attach to their tax returns. The form has usually been completed by their employer. If the taxpayers file electronically, the T1198 figures are keyed in. The name of the lump-sum recipient appears on the T1198 form as well as the year in which the lump-sum was received. The amount is broken down between principal and interest. There are then a series of blank spaces identified by year from 1978 (the earliest year to which the QRLSP mechanism's relief extends) to the current taxation year. The amount of principal relating to each year is entered into the appropriate blank spaces. In the case of the federal public service pay equity payments, the employer issued a Form T1198 to all recipients.


[28] Ms. Barnard testified that upon receipt of an income tax return with a T1198 form or an equivalent electronically filed return, the CRA assessing system automatically performs both the regular tax calculation and the special QRLSP tax calculation, provided the portion of the principal relating to prior years is $3,000 or more.


[29] Ms. Barnard explained that the special QRLSP tax calculation is performed as follows:


1) The amount of the qualifying retroactive lump-sum payment is deducted in computing the taxable income in the year in which the lump-sum was received (the "Current Year").


2) Basic federal tax is computed on the reduced taxable income of the Current Year using the tax rates and non-refundable tax credits applicable in the Current Year.





3) A tax adjustment (which is an addition to the basic federal tax) is calculated as a total of:


a. All amounts each of which would be the increase to the basic federal tax for each preceding year, calculated as if the relevant portion of the lump-sum had been received in the year to which it relates, and


b. Interest computed on the increase to basic federal tax for each preceding year, using the prescribed refund rate, from May 1 of the year following the year to which the portion of the lump-sum relates to the end of the year preceding the year in which the lump-sum is received.


4) The tax adjustment is added to the basic federal tax on the reduced taxable income for the Current Year.


[30] Once the CRA has completed this calculation, it then compares the results of the regular tax calculation (i.e., taxing the lump-sum in full in the Current Year) with the special QRLSP calculation to determine the method that is most advantageous to the taxpayer. If the QRLSP tax calculation is more advantageous, the CRA uses it to assess the return for the Current Year. If the QRLSP is of no benefit, the CRA assesses the return using the regular tax calculation. The CRA then issues a Notice of Assessment or Reassessment with an explanation indicating whether the QRLSP tax calculation was beneficial, followed by a letter to the taxpayer explaining the calculation and comparison in detail.


[31] Simply put, the exercise consists of recalculating the Current Year's federal income tax without the lump-sum, and then adding to that tax the amount of federal income tax that would have been payable had the lump-sum amounts been paid in the years to which they related. If the lump-sum has placed the taxpayer into a higher tax bracket in the Current Year, then logically, assessing the taxpayer at the lower marginal tax rates that he or she was paying in prior years would result in a reduction of tax payable. However, there is one other factor to be taken into account - the interest that also forms part of the calculation. When the compounded interest is added, the likely effect is that any benefit from calculating the income tax payable on retroactive payments at the lower marginal rates is negated to varying extents by the compound interest that is included in the calculation. For this reason, retroactive payments extending back six years or more are not likely to benefit from the QRLSP mechanism.

propat

no buds it was another QRLSP calculation sheet from the CRA.

i will post leagal testamony as to how the calculations are applied durring a lawsuit from the lady that was in charge of this at the CRA.

propat

Like I said, I am not going to get into a shouting match with anyone, the tax lawyer I spoke to spoke of 'new' rules, so I will just wait and see, given that some of the opinions here are referencing information dated 2003 and 2004.

I can understand the concept behind the penalties, IF I received the income but didn't declare it, but we DIDN'T receive the income, so we couldn't declare it, therefore there should be no penalties.

I will wait and see, and sock some money away just in case. Either we get penalized and I have the money to cover it, or we don't get penalized and I have the money for a nice vacation.

Hi Propat,
Was this retro in relation to a class action suit ?

these were just call of duties.

propat

After talking with Peter this morning I have decided to send a letter of objection based on the Tax Nuetrality top up of 3.27%.

Heres why: I will show you a QRLSP Tax return I did from 1990-2002 having the income spread out and being assessed with the revised Taxes + the additional Deemed taxes so you can see the impact, that alot of Zero Sums are facing. Note revised tax is also known as the( Tax Difference)

revised tax 2002 = 0 Deemed tax =0 Deemed tax % applied=0
revised tax 2001 =0 Deemed tax=0 Deemed tax % applied=0
revised tax 2000=1202.83 Deemed tax=121.40 Deemed tax % applied=10%
revised tax1999=1830.64 Deemed tax352.29 Deemed tax% applied=19.5%
revised tax1998=1887.64 Deemed tax528.74 Deemed tax % applied=28%
revised tax1997=1823.89 Deemed tax680.15 Deemed tax% applied=38%
revised tax 1996=2490.17 Deemed tax1136.89 Deemed tax % applied=46%
revised tax 1995=2419.79 Deemed tax1350.65 Deemed tax%applied=55%
revised tax1994=2607.23 Deemed tax 1864.78Deemed tax%applied=72%
revised tax1993=4582.84 Deemed tax 3939.43 Deemed tax applied=86%
revised tax1992=1725.44 Deemed tax1733.18 Deemed tax %applied=101
revised tax 1991=0 Deemed tax =0 Deemed tax% applied= Guess 120%
revised tax 1990=678.64 Deemed tax=993.93 Deemed tax % applied=146%

This was just the federal portion. Total Tax Difference= 21,249.11 Total Deemed taxes=12,701.44

Deemed tax % overall= 60% in additional Taxes Tax nuetrality top up + 3.27% ? is it even fair or close?

Fainess provision response letter

Dear Sir

This is further to our telephone conversation of August 31, 2004.

As discussed, we have received an answer from our legal department concerning whether or not the Notional tax payable (Deemed tax) should be considered under Fairness Legislation.

Issue:
Whether the portion of notional tax payable calculated under paragraph 120.31 (3) (b) of the Income Tax Act (the Act) in respect of certain qualifiying lump sum amounts, is regarded as Interest that the Minister of National Revenue is authorised to waive under 220(3.1) of the Act.

Response from our Legal Department:
"The amount calclated under paragraph 120.31 (3) (b) of the Act is the amount added to an Individual's tax payable. The Deemed tax is calculated using our refund interest rates on the difference between the revised tax payable and the actual tax paid.

We also note that the 1999 Department of Finance Technical notes state the the " notional amount of Interest... is not considered to be Interest for any purpose of the Act." On this basis, we are of the view that the amount determined in paragraph 120.31(3) (b) is not Interest.

We would like also like to note that, even if the amount calculated in paragraph 120.31 (3) (b) were Interest, the pupose of sections 110.2 and 120.31 of the Act is to provide relief to taxpayers by giving them the benifit of paying the lower of the two amounts as discussed above. Therefore, it is not appropriate to consider waiving the amount under subsection 220 (3.1) of the Act"

I trust this clarifies the situation
Yours sincerely,

P ST George
problem resolution coordinator

Letter from CRA Re notice of Objection dated Dec 29,2003

We have completed a review of your income tax return and the related assessment for which you filed the above objection.

Generally, income is taxed in year you receive it. However,for "Qualifiying retroactive Lump Sum payments" (QRLSP) as defined by section 110.2 of the Income Tax Act, we reduce your taxable incomefor the year by the part of payment that relates to the eligible tax years for which you filed income tax returns. An eligible tax year is a previous year during which you were a Resisdent of canada, not bankrupt, an not a farmer or fisher who had used this year in an election for income averaging.

In accordance with Section 120.31. tax is calculated on the reduced taxable income in the usual way, and a tax adjustment is added for the previous- year part of the payment. the tax adjustment consists of the Tax Difference for each of the previous years, plus a Deemed tax that represents the cost to the Gouvernment of the delay in the payment of the tax difference. Deemed tax is calculated using our prescribed refund interest rate from May 1st of the year following the eligible tax year to December 31 of the year before the year in which the payment was received. Section 120.31 of the Income Tax Act provides the authority to calculate this Deemed tax..

Greatfoot,
What you stated, is exactly what was told to me, by a specialist at CRA, she said that they cannot induce penalties on our retro payments.
She was fully aware of our class action suit.
She also said that when we receive our retro / letter from MC, to call CRA asap, to have them advise us on what avenue to take.
I told her that they were a lot of vets worried about retro tax penalties, she said tell them not to worry, they can't penalize you for money that was yours, no matter how far back they go.Just regular tax, and they will pick the lowest tax year.

well all i can say is i would have had to pay it but i payed in one year at an increased tax rate as the past years lower rate plus deemed tax would have had me paying more.now that is from the CRA.they have did this to many others in the past some on this site.i for one will not wait i will apply to the CRA to have these penelties waved the day i get my worksheet.they have the aplication right on there site to have these fees waved.my advise?? APPLY!!!THEN APEAL!!!if these penelties dont exist you wasted 10 minuets.if they do on the slim chance you get accepted you can save aprox 5-100 thousand depending on your situation.so the form is free to download from the internet and takes less time to fill out than going to the store to buy a lotto ticket.hmmmm what would you do????

propat

Thank you Greatfoot ~ good advice for us all.
sparrow

So, I consulted a tax lawyer as well, and this is what he told me, of course, your mileage may vary, depending on your source:

"Under the terms of the ITAR (which I believe is Income Tax Application Rules, or some such similar nonsense) Revenue Canada will do two sets of calculations, one as if I received the money in the year it was owed, and another in which I receive the money as a lump sum in the year it is paid. It is a non-biased process, to determine in which case I will pay the LEAST tax and they will apply that solution. Further, there will not be deemed tax penalties, given that I never received the money in the year I was supposed to, just regular tax."

Now, I know that some others have received information to the contrary, and it is not my place to dispute their facts. All I am saying, or rather passing on, is what I have been told by a tax lawyer. So, there it is, take it for what it's worth, I'm not going to get into a pissing contest with anyone.

We may, or may not, be required to pay penalties on past income. I am going to play it by ear, and wait to see what the tax man says in the year 2014. But I will not panic about deemed taxes, nor will I count my chickens before they hatch.

mfors,
It's not over yet we have a little over 14 months to work on the 2013 tax year.

WHY WOULD THE GOVERMENT APPROUVE ANY SUCH CLAIMS FOR TAX RELIEF?? THEY BEEN AT THE TABLE THE WHOLE TIME.. THEY FAUGHT VERY HARD TO ONLY GIVE 3.25% WHY ARE THEY ALL OF A SUDDEN GOING TO ROLL OVER AT TAX SEASON .... both sides been in touch with cra.... gov canada doing tricks we could never even imagine.... this lawsuit is going to pay for itself with all interest they occured with money they been stealing and bring them over the top when they get tax present from us