7 September 2004 External T.I. 2004-0073081E5 - Retroactive Lump Sum Payment of OAS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. Is there any legislative relief from the application of the Part I.2 tax in the case of a retroactive lump sum payment of benefits under the OAS?

2. If not, is there any administrative relief available?

Position: 1. There is no legislative relief available for the Part I.2 tax, however section 110.2 of the Act provides relief from the Part I tax under certain circumstances.

2. The CRA may waive the withholding on the Part I.2 tax in cases of "undue hardship" provided certain conditions are met.

Reasons: 1. Wording of the Act.

2. CRA policy.

XXXXXXXXXX  								2004-007308
C. Lalonde
September 7, 2004

Dear XXXXXXXXXX:

Re: Retroactive Lump-Sum Payment of Old Age Security ("OAS") Benefits

This is in response to your letter of April 23, 2004 enquiring about the possibility of obtaining some relief with respect to OAS benefits required to be repaid, pursuant to section 180.2 of the Income Tax Act (the "Act"), in a situation where the OAS benefits are received as a retroactive lump sum applicable to prior years. In your letter, you also ask for our comments concerning the Willard Thorne remission order which deals with a similar situation.

Our comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide the following general comments which may be of assistance.

Section 180.2 of the Act provides for the repayment by a taxpayer of OAS benefits included in computing the taxpayer's income, to the extent that the taxpayer's income is in excess of a $50,000 indexed threshold (i.e., $57,879 in 2003). This repayment is done through a recovery tax, the Part I.2 tax. The amount of tax required is equal to 15% of the taxpayer's income in excess of the $50,000 indexed threshold, up to the total of the OAS benefits included in the taxpayer's income for the year. The tax must be withheld monthly from the OAS benefits and the withholding is based on the taxpayer's income in preceding taxation years.

The Willard Thorne remission order (P.C. 2002-2177) was granted on December 2, 2002. In that case, Mr. Thorne received a retroactive lump sum payment of benefits under the Canada Pension Plan, covering the period of 1985 to 1987. The inclusion of the lump sum amount in his income caused Mr. Thorne a tax liability in 1987. However, had there not been a delay in the payments of benefits to which he was entitled, Mr. Thorne would not have had any tax liability in either year. Consequently, the Governor General in Council remitted the full amount of tax under Part I of the Act for the 1987 taxation year.

The remission order did not apply to the Part I.2 tax as it did not exist at that time. This tax was introduced into the legislation for the 1989 and subsequent taxation years.

In 1987, when Mr. Thorne received the retroactive lump sum payment to which the remission order was granted, there was no relief available to him under the Act. However, in 2000, new relieving provisions were introduced into the Act that apply to retroactive lump sum payments received after 1994. These provisions, sections 110.2 and 120.31 of the Act, provide relief to individuals who receive a lump-sum payment relating to prior years and whose tax liability under Part I of the Act with respect to that amount is higher than it would have been if the amount had been taxed on an on-going basis from the date of eligibility.

Pursuant to section 110.2 of the Act, individuals are allowed to deduct in computing taxable income for a taxation year, the "specified portion", in relation to an "eligible year," of a "qualifying amount" received by the individual in that year, if the total is $3,000 or more.

For the purposes of this special tax calculation, an "eligible taxation year" is, essentially, a preceding taxation year in respect of which a lump sum payment is received by an individual. A "qualifying amount" includes, among other things, a payment under the Old Age Security Act. The "specified portion", in relation to an eligible taxation year, of a qualifying amount is the portion of the qualifying amount that relates to that year, provided that the individual's eligibility to receive that portion existed in that year.

Section 120.31 of the Act then provides for the calculation of an individual's tax payable for a taxation year on that portion of a lump-sum payment that has been deducted under subsection 110.2(2) in computing the individual's taxable income for that year. This tax is the total of the additional taxes that would be triggered for each relevant preceding year if the portion of the lump-sum payment that relates to that preceding year were added to the individual's taxation income for that year.

A notional amount of interest is also added to the additional tax computed for each relevant preceding year to take into account the fact that the calculation of the tax on the lump-sum payment should reflect not only the additional tax that would have been payable had the payment been received on an on-going basis, but also the fact that this additional tax was not paid during those preceding years.

To take advantage of this special tax calculation, your client must file form T1198, Statement of Qualifying Retroactive Lump-Sum Payment, with his tax return for the year in which the lump sum amount was received.

There is no similar legislative relief for the Part I.2 tax. However, the Canada Revenue Agency ("CRA"), may waive the withholding of the Part I.2 tax where clients have substantially lower income in a current year, compared to the income on the tax return on which the Part I.2 tax is based. If the repayment of the OAS through the withholding of the Part I.2 tax will cause these clients "undue hardship", the clients may request a reduction in the amount of Part I.2 tax being withheld. Waiver requests must be submitted in writing to your client's local tax services office. Each request should include complete information regarding the client's sources of income for the current year, estimated tax deducted from each source, and the amount of installment remittances already made for the year. The client's prior year tax returns must be filed up to date.

The form mentioned above is available from your local tax services office or on the Internet at: http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch