Legal Fees (Assorted Topics)

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.

Propat great info you are posting but one glaring point to remember here...you are quoting letters/phone calls from 9/10 years ago.

Have you checked to see if this info from then is still valid?

I know that tax laws are changed every year. So that is why I'm asking if you have called to see if your posts are still valid?

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

propat

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..


GuestGuest


propat

income tax act 164.3

Interest on refunds and repayments

(3) If, under this section, an amount in respect of a taxation year (other than an amount, or a portion of the amount, that can reasonably be considered to arise from the operation of section 122.5 or 122.61) is refunded or repaid to a taxpayer or applied to another liability of the taxpayer, the Minister shall pay or apply interest on it at the prescribed rate for the period that begins on the day that is the latest of the days referred to in the following paragraphs and that ends on the day on which the amount is refunded, repaid or applied:

(a) if the taxpayer is an individual, the day that is 30 days after the individual’s balance-due day for the year;


(b) if the taxpayer is a corporation, the day that is 120 days after the end of the year;


(c) if the taxpayer is

(i) a corporation, the day that is 30 days after the day on which its return of income for the year was filed under section 150, unless the return was filed on or before the corporation’s filing-due date for the year, and


(ii) an individual, the day that is 30 days after the day on which the individual’s return of income for the year was filed under section 150;



(d) in the case of a refund of an overpayment, the day on which the overpayment arose; and


(e) in the case of a repayment of an amount in controversy, the day on which an overpayment equal to the amount of the repayment would have arisen if the total of all amounts payable on account of the taxpayer’s liability under this Part for the year were the amount by which

(i) the lesser of the total of all amounts paid on account of the taxpayer’s liability under this Part for the year and the total of all amounts assessed by the Minister as payable under this Part by the taxpayer for the year


exceeds

(ii) the amount repaid.


propat

income tax act 120.31

Lump-sum Payments

Marginal note:Definitions

120.31 (1) The definitions in subsection 110.2(1) apply in this section.


Marginal note:Addition to tax payable

(2) There shall be added in computing an individual’s tax payable under this Part for a particular taxation year the total of all amounts each of which is the amount, if any, by which

(a) the individual’s notional tax payable for an eligible taxation year to which a specified portion of a qualifying amount received by the individual relates and in respect of which an amount is deducted under section 110.2 in computing the individual’s taxable income for the particular year


exceeds

(b) the individual’s tax payable under this Part for the eligible taxation year.



Marginal note:Notional tax payable

(3) For the purpose of subsection (2), an individual’s notional tax payable for an eligible taxation year, calculated for the purpose of computing the individual’s tax payable under this Part for a taxation year (in this subsection referred to as “the year of receipt”) in which the individual received a qualifying amount, is the total of

(a) the amount, if any, by which

(i) the amount that would be the individual’s tax payable under this Part for the eligible taxation year if the total of all amounts, each of which is the specified portion, in relation to the eligible taxation year, of a qualifying amount received by the individual before the end of the year of receipt, were added in computing the individual’s taxable income for the eligible taxation year


exceeds

(ii) the total of all amounts each of which is an amount, in respect of a qualifying amount received by the individual before the year of receipt, that was included because of this paragraph in computing the individual’s notional tax payable under this Part for the eligible taxation year, and



(b) if the eligible taxation year ended before the taxation year preceding the year of receipt, an amount equal to the amount that would be calculated as interest payable on the amount, if any, by which the amount determined under paragraph (a) in respect of the eligible taxation year exceeds the taxpayer’s tax payable under this Part for that year, if the amount that would be calculated as interest payable on that excess were calculated

(i) for the period that began on May 1 of the year following the eligible taxation year and that ended immediately before the year of receipt, and


(ii) at the prescribed rate that is applicable for the purpose of subsection 164(3) with respect to the period.



propat

*** Transcriber's Note: Please set your voice synthesizer to read most
punctuation. When you encounter the caret sign at the end of a line, please
enter the applicable information, if necessary. ***

T1198 E (12) (Front)

Canada Revenue Agency

Protected B when completed

Statement of Qualifying Retroactive Lump-Sum Payment

To the payer:

Complete this form if you paid a qualifying retroactive lump-sum payment
(QRLSP) to an individual (other than a trust) in 1995 or later years. Enter
the amount of the QRLSP and its breakdown in the appropriate boxes below.
Give the completed and signed form to the recipient of the QRLSP. If you paid
more than one QRLSP to an individual, complete one form for each QRLSP paid.
See the back of this form for details.

Note:
The QRLSP income indicated on this form has to be reported on the recipient's
information slip (such as a T4, T4A, T4E).

To the recipient:

We will not reassess your returns for prior years to include this income.
However, you can ask us to tax the parts for the prior years as if you
received them in those years. You have to include the whole payment on the
appropriate line of your return for the year. See the back of this form for
details.

Name of recipient ^
Social insurance number (enter 9-digit number) ^
Year of payment ^
Description of QRLSP and reasons for payment ^

Line 6850: Total amount (principal and interest) ^

Line 6851: Total principal (current and prior years) ^

Total interest (current and prior years) ^

Total principal (prior years only) ^

Breakdown of principal (box 6851)

In the boxes below, enter the amount of principal that relates to each
applicable year. Do not include interest amount.

Line 6852: 1978 ^
Line 6853: 1979 ^
Line 6854: 1980 ^
Line 6855: 1981 ^
Line 6856: 1982 ^
Line 6857: 1983 ^
Line 6858: 1984 ^
Line 6859: 1985 ^
Line 6860: 1986 ^
Line 6861: 1987 ^
Line 6862: 1988 ^
Line 6863: 1989 ^
Line 6864: 1990 ^
Line 6865: 1991 ^
Line 6866: 1992 ^
Line 6867: 1993 ^
Line 6868: 1994 ^
Line 6869: 1995 ^
Line 6870: 1996 ^
Line 6871: 1997 ^
Line 6872: 1998 ^
Line 6873: 1999 ^
Line 6874: 2000 ^
Line 6875: 2001 ^
Line 6876: 2002 ^
Line 6877: 2003 ^
Line 6878: 2004 ^
Line 6879: 2005 ^
Line 6893: 2006 ^
Line 6894: 2007 ^
Line 6895: 2008 ^
Line 6896: 2009 ^
Line 6897: 2010 ^
Line 6898: 2011 ^
Line 6899: 2012 ^
Line 6900: 2013 ^

Certification

I, First and last name (please print), ^
certify that the information given on this form is, to the best of my
knowledge, correct and complete.

Signature of payer ^
Position or office ^
Date (Year/Month/Day) ^

Privacy Act, Personal Information Bank number CRA PPU 005


T1198 E (12) (Back)

Statement of Qualifying Retroactive Lump-Sum Payment
Information for payers and recipients

What is a qualifying retroactive lump-sum payment (QRLSP)?

A QRLSP is a lump-sum payment paid to an individual (other than a trust) in a
year that relates to one or more prior eligible taxation years throughout
which the individual was a resident of Canada. To be a qualifying amount, the
payment must have been paid after 1994 from one of the following sources:

- income from an office or employment received under:
-- an order or judgment from a court or other competent tribunal;
-- an arbitration award; or
-- a lawsuit settlement agreement (including damages for loss of office or
employment);
- benefits from unemployment insurance or employment insurance;
- benefits from a superannuation or pension plan (other than non-periodic
benefits such as lump-sum withdrawals);
- spousal, common-law partner, or taxable child support payments;
- benefits from a wage-loss replacement plan; or
- Canadian Forces members and veterans income replacement benefits.

Note: a year in which an individual became bankrupt is not an eligible
taxation year.

Amounts not qualifying

An amount received under any part of a retroactive lump-sum payment that is
eligible for any of the following deductions, is not a qualifying amount:

- legal expenses;
- salary reimbursements;
- reimbursement of top-up disability payments;
- repayment of pension or benefits;
- deduction of social assistance payments, workers' compensation, etc.

An amount under normal collective bargaining, such as negotiated back pay is
not a qualifying amount, (although, an amount from an arbitration award does
qualify).

Why provide the breakdown of a QRLSP?

Generally, a lump-sum payment is included in income in the year when the
recipient receives it. This may result in a greater tax liability than if the
payment had been received in the year or years to which it related.

A special tax calculation is available to individuals who receive QRLSPs that
relate to any year after 1977. The calculation applies if the total of all
principal amounts that relate to prior years (after 1977) from all QRLSPs is
$3,000 or more.

If you are the payer of a QRLSP, complete this form to help us determine if
the special tax calculation is beneficial to the recipient.

If you are the recipient of a QRLSP and if the amount shown under "Total
principal (prior years only)" is $3,000 or more, attach Form T1198, Statement
of Qualifying Retroactive Lump-Sum Payment to your return for the year of
payment to ask for a special tax calculation. If you have more than one QRLSP
form, add the amounts shown under "Total principal (prior years only)" on all
your forms. If the result is $3,000 or more, attach to your return the QRLSP
forms that payers have given you.

trooper I think you may be assuming way too much.

by filling out the form you are in no way asking them to reassess your previous years as this may be detrimental to you. you are simply asking them to do the calculations for the previous tax years and the whole amount in the currant year then they will advise you as to witch is the most beneficial to you.

once you have their advice you can then ask to take these in the past years. only after they have your premition are they allowed to reassess your previous years. that is when they apply the SPECIAL CALCULATIONS they speak of.

and your right no penelties ore interest at least according to them.

they will only refer to it as deemed tax ore notional tax witch is roughly the average annual bond rate plus 2% for each year compounded yearly.

when my ass is sore come tax time they can call it a repetitive temporary hemroid all they want ill know I just got fracked.

propat

propat, this is the way I read it, and understand it.

                                                                                 Qualifying Retroactive Lump-Sum Payment ( FORM T1198 )

" We will not reassess your returns for prior years to include this income. "
What CRA is stating here is that those who complete, and submit the T1198 form along with their tax return, will not be reassessed for prior years of their income, with respect to their Retroactive Lump-Sum Payment. In order for the CRA to impose any penalty, and or penalties on us, they will have do do a reassessment on our taxes to apply any such penalties. This is a fact, this is not and assumption, how could they reassess us, when they clearly state in Black & White that they will not.
I do not see how anyone can interperate it any other way.

                                                                                    Qualifying Retroactive Lump-Sum Payment ( FORM T1198 )

"  However, you can ask us to tax the parts for the prior years as if you received them in those years. "
What the CRA is stating here is that by completing, and submitting the T1198 along with your tax return, you are asking the CRA to tax the parts for prior years as if you received them in those years. This means that when you complete your 2013 tax return, and claim your whole retro for that year, you will be taxed as per the 2013 tax rate, for that year. By completing, and submitting the T1198 form, CRA will calculate each year going back, as if you would have received them in those tax years, So if some, or all of those tax years turns out to be a lower tax rate amount, than the 2013 tax rate, members could benefit from taking that route.
Again no penalties. So my advice would be to complete and submit the T1198 along with your return.
This information is taken directly from CRA's ( FORM T1198 )

Just one note that I would like to add..... From CRA tax guide......Qualifying Retroactive Lump-Sum Payment......Form T1198.....We will not reassess your returns for previous years to include this income. However, you can ask us to tax the parts for the previous years as if you received them in those years. So in other words no reassessment = no penalties.

you do see where the say they will not reassess prior to saying HOWEVER , you can ask us to tax the parts for the previous years as if you received them in those years.

we all know what HOWEVER means.

if you chose to take this in past years they will use their SPECIAL CALCULATIONS as they call it and reassess your previous years.

so if you take it in previous years those years will be reassessed and deemed tax ore notional tax will be added.

the will not call it a penalty ore interest for that matter even though while one of our own members who took them to court over the deemed tax the judge said to this issue "if it walks like a duck and talks like a duck its a duck"

propat

Also propat, I have the T1198 form in view, but it is in pdf format, and it won't allow me to copy & paste it, if someone has that capability, I think it would be a good Idea to post it here, for all to see. It explains it all.

Thanks for your input propat, excellent discussion. I have added some more info, to one of my previous post.

WHAT WILL HAPPEN

knowing the sedate nature of most canadians few will file a request for tax relief.

only after seeing the huge amount on their tax worksheet will the majority of the long term guys add the t1198 hoping against hope and all will be told it will be done all in one year all will have tax owing.

half the short term guys will file a t1198 the other half because of the small amount will not really give a crap and not bother most will have tax owing .

a judicial review is filed and ( I think at least 50/50) fails and nothing changes.

OR the review is successful and the few members who filed a request for tax payer relief form get a refund cheque with the long term guys getting huge ones along with any other Canadians who filed a request for tax relief over a GOC frack up.

propat

WHAT SHOULD HAPPEN

all members file a request for tax relief with their t1198.
all will be denied request for tax relief.

all long term 6 year + guys get told they will be done over 1 year and all of theses guys will have tax owing.

most short term guys get told they will be done over past years 2/3rds will have tax owing 1/3 will get some back.

someone (say k-9) will launch a judicial review perhaps framing his argument simply as (deemed tax ore notional tax if you will = interest and CRA = GOC) ore just simply in respect to fairness. over a period of time he wins and all members get a refund cheque with the long term guys getting huge ones along with any other Canadians who filed a request for tax relief over a GOC frack up.

propat

I could be wrong here, but this is the way I think it will play out come tax time.

When filling your 2013 tax return, all members will claim the full amount of retro received for that year, when filling their return.

Those members who choose to submit the T1198 form along with their tax return, will have their calculations done by the CRA, as if they would have received their retro, going back to each year, from which they would have received it.

If the CRA's calculations prove to benefit the member, a refund cheque will be sent to that member.

If the CRA's calculations prove to not benefit the member, the original filling of the members tax return, will remain unchanged.

So that is just the way I think that it will play out, I welcome any members thoughts on this, as to the way they feel it will play out.

Just one note that I would like to add..... From CRA tax guide......Qualifying Retroactive Lump-Sum Payment......Form T1198.....We will not reassess your returns for previous years to include this income. However, you can ask us to tax the parts for the previous years as if you received them in those years. So in other words no reassessment = no penalties.

buds keep in mind that if I am correct their is no penalty, deemed tax ore notional tax whatever they might want to call it on the past two years ie.2012 and 2011 so if your only a few years you will do fine with the tax issue. 5-6 years they will say take it all in one year ore take it in the past years and you will save a little.any longer than that and expect them to tell you to take it all in one year so you should prepare for that. since you have a choice worst case scenario you take the hit in one year it sucks but if your prepared for it that will alleviate any stress.

propat