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: Is the amount calculated in paragraph 120.31(3)(b) interest that can be waived under subsection 220(3.1)?

Position: No.

Reasons: Although the amount is "calculated as interest payable on the amount determined under paragraph (a) if it were so calculated", it is not interest. It is tax.

		July 26, 2004

Ms. Jacinthe Dubé	HEADQUARTERS
	Client Services Division 	Terry Young, CA
	Assessment and Collections Branch	613-952-1506
	750 Heron Road, 7th Floor
	Ottawa ON
		2004-007553

Retroactive Lump Sum Amounts and Fairness Provisions

We are writing in response to your email of May 11, 2004, concerning 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 qualifying lump sum amounts, is regarded as interest that the Minister of National Revenue is authorized to waive under 220(3.1) of the Act.

Background

For individuals, income from most sources is taxable in the year in which it is received. As a result, individuals are generally taxable on retroactive lump-sum payments in the year they are received, even though a significant portion may relate to prior years. Due to the progressive rate structure of the income tax system, the tax payable on those lump-sum payments may, therefore, be significantly higher than it would have been if payments had been received and taxed on an ongoing basis from the date of eligibility. To address this concern, sections 110.2 and 120.31 of the Act were enacted. Section 110.2 of the Act allows an individual (other than a trust) to deduct from income "qualifying amounts" received in the year that relate to prior years. The term "qualifying amount" is defined in subsection 110.2(1) and includes certain lump-sum payments of employment income, periodic pension benefits (other than CPP or QPP benefits), wage loss replacement plan benefits, support payments, and Employment Insurance benefits.

When a taxpayer claims a deduction under section 110.2 of the Act, an amount is added to Part I tax payable pursuant to subsection 120.31(2) of the Act equal to the "notional tax payable" in each eligible taxation year less the tax actually payable for that year. Pursuant to subsection 120.31(3), notional tax payable for any eligible taxation year consists of the total of the following amounts:

? Under paragraph 120.31(3)(a), the amount of tax that would have been payable in the eligible taxation year had the applicable portion of the qualifying amount been received in that year; and

? Under paragraph 120.31(3)(b), where the eligible taxation year ended before the taxation year preceding the year of receipt, a notional amount of interest equal to the amount that "would be calculated as interest payable on the amount determined under paragraph (a) if it were so calculated" using the interest rate used to calculate overpayment interest.

Where a taxpayer wishes to apply sections 110.2 and 120.31 of the Act and files the form T1198, Statement of Qualifying Retroactive Lump-Sum Payment, the CRA calculates the amount of tax payable using these provisions, compares it to the amount otherwise payable under the Act, and assesses the lower of the two amounts.

Our Comments

As noted above, the amount calculated under paragraph 120.31(3)(b) of the Act is an amount added to an individual's tax payable that would have been interest, if it were so calculated, on the amount calculated under paragraph 120.31(3)(a) had it actually been payable. We also note that the 1999 Department of Finance Technical Notes state that 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 also like to note that, even if the amount calculated in paragraph 120.31(3)(b) were interest, the purpose of sections 110.2 and 120.31 of the Act is to provide relief to taxpayers by giving them the benefit of paying the lower of two amounts discussed above. Therefore, it may not be appropriate to consider waiving the amount under subsection 220(3.1) of the Act. In this regard, you may wish to consult with the Fairness Provisions and Voluntary Disclosures Program Division in the Appeals Branch, who we understand has responsibility for developing and maintaining the national cross-functional fairness policy and guidelines.

We trust our comments are of assistance.

Randy Hewlett, B. Comm.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch

c.c. Louise Chénier
A/Director
Fairness Provisions and Voluntary Disclosures Program Division
Appeals Branch