A taxpayer is in receipt of Old Age Security ("OAS") benefits and net federal supplements ("NFS"). Whether the offsetting deduction for NFS under paragraph 110(1)(f) is reduced to the extent that NFS are repayable as Part I.2 tax?
OAS benefits and NFS are included in computing income under clause 56(1)(a)(i)(A). However, NFS are effectively rendered non-taxable by virtue of the paragraph 110(1)(f) deduction. Where a taxpayer is in receipt of OAS benefits and/or NFS, the taxpayer may be subject to the Part I.2 tax. Paragraph 60(w) provides a deduction for the amount of Part I.2 tax payable for the year.
While the legislation does not expressly provide for an allocation of the Part I.2 tax between OAS benefits and NFS, the Department's position is that the Part I.2 tax is applied to OAS benefits before NSF. Therefore, any excess of the Part I.2 tax over OAS benefits is considered to be a repayment of NFS to the extent of NFS included in income. Given that a deduction is available under paragraph 60(w) for the amount of Part I.2 tax payable, it is our view that subsection 248(28) would apply to reduce the paragraph 110(1)(f) deduction by the amount of Part I.2 tax that is considered to be a repayment of NFS.