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: Does a deduction under subsection 110.2(2) of the Act result in a retroactive adjustment to an individual's earned income for RRSP purposes?
Position: No.
Reasons: The law.
XXXXXXXXXX 2009-034511
Michael Cooke, C.A.
March 8, 2010
Dear XXXXXXXXXX :
Re: Subsection 110.2(2) and Earned Income for RRSP Purposes
We are writing in response to your letter of October 14, 2009, wherein you asked whether a taxable lump-sum payment received in a particular taxation year and deducted under subsection 110.2(2) of the Income Tax Act (the "Act") by an individual would result in a retroactive adjustment to the individual's earned income for RRSP purposes.
Our Comments:
Generally speaking, sections 110.2 and 120.31 of the Act may provide relief to individuals (other than trusts) who receive certain taxable lump-sum payments. Under these provisions, if an individual's current income tax liability under Part I of the Act for such a lump-sum amount is higher than it would have been if each portion of the particular lump-sum amount had been subject to income tax in the particular taxation year to which it otherwise relates ("notional Part I tax"), the individual's current income tax liability in respect of these amounts can essentially be computed based on the lower amount of notional Part I tax.
More specifically, in computing the taxable income of an individual for a taxation year, subsection 110.2(2) of the Act permits the deduction of the total of all amounts each of which is a "specified portion" of a "qualifying amount" received by the individual in the particular year if the total is $3,000 or more. In addition, a specified portion must relate to an "eligible taxation year". Each of these terms is defined in subsection 110.2(1) of the Act. For purposes of this letter, we have assumed that the scenario has properly applied the definitions.
Where an amount is deducted in computing an individual's taxable income under subsection 110.2(2) of the Act, section 120.31 of the Act provides for the calculation of an additional income tax payable for the individual for that taxation year on the amount so deducted. The additional income tax payable is the total of two amounts. First, it is the total of the additional notional Part I taxes payable that would be triggered for each relevant preceding year (i.e., "eligible taxation year") if the specified portion of the lump-sum payment that relates to a particular preceding taxation year had been added to the individual's income for that taxation year. Second, it includes a notional amount of interest that is computed for each relevant preceding taxation year to take into account the fact that this additional notional amount of Part I income tax was not paid during those preceding taxation years.
It should be pointed out that although the additional income tax under section 120.31 of the Act is computed on the basis that the individual received the particular specified portion of the qualifying amount in a particular preceding taxation year to which it relates, the amount of the individual's net income or taxable income for any preceding taxation year is not actually recomputed or affected in any way.
The expression "earned income" is defined in subsection 146(1) of the Act and is relevant in determining the maximum deduction in respect of premiums paid by a taxpayer under an RRSP. As indicated in that definition, earned income will include various amounts and is essentially the net income from those identified sources for that year. Where a lump-sum payment is a qualifying amount and is included in the taxpayer's earned income calculation for the year of receipt, the fact that some or all of the lump-sum is deducted under subsection 110.2(2) of the Act in computing the individual's taxable income for that year does not result in any retroactive change to the individual's earned income in any preceding year.
We trust our comments will be of assistance to you.
Yours truly,
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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