20 June 2013 Internal T.I. 2013-0488321I7 - Retroactive Lump Sum RPP Payment

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: Whether a retroactive lump sum payment of pension benefits relating to prior years is considered a qualifying amount for purposes of section 110.2 entitling the recipient to a special tax calculation in accordance with section 120.31 of the Act.

Position: Question of Fact, but generally yes.

Reasons: A qualifying amount for purposes of s 110.2 includes a superannuation or pension benefit.

XXXXXXXXXX
2013-048832

June 20, 2013

Dear XXXXXXXXXX

Re: Retroactive Lump Sum Pension Payments

This is in response to your email of June 13, 2013 for a written technical interpretation providing the tax implications that a retroactive lump sum payment paid from the federal public service pension plan (the "Payment") will have on retired plan members. You indicate that numerous retired plan members will be paid the Payment to compensate for underpaid pension amounts that relate to calculation errors in one or more previous taxation years. It is your understanding that the Payment represents a qualifying retroactive lump-sum payment that is taxable to the retired plan member.

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 submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. We are, however, prepared to offer the following general comments, which may be of assistance.

Under subparagraph 56(1)(a)(i) of the Income Tax Act (the "Act"), any amount received by a taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of, a superannuation or pension benefit is included in income. Pursuant to subsection 248(1) of the Act, a superannuation or pension benefit includes any amount received out of a superannuation or pension fund or plan. This would generally include a lump-sum payment from the federal public service pension plan and be required to be included in the recipient's income in the year of receipt. However, subsection 110.2(2) of the Act provides a deduction from taxable income for a taxpayer who receives a lump sum superannuation or pension benefit if certain conditions are met and the payment is considered a "qualifying amount", as defined in subsection 110.2(1) of the Act.

Where a taxpayer claims a deduction under subsection 110.2(2) of the Act, section 120.31 of the Act provides for a special tax calculation that is meant to approximate the tax and interest that would result if the taxpayer's personal tax return for prior taxation years were adjusted to include the portion of the lump sum amount that relates to the prior year. The rules in section 120.31 of the Act provide for a limited type of retroactive averaging of taxes payable if, among other conditions, the total of the qualifying amounts that relate to prior years is $3,000 or more. The qualifying amount must relate to one or more years preceding the year of payment and after 1977.

As such, provided all the conditions of subsection 110.2 of the Act are satisfied, the Payment made by the federal public service pension plan to retirees in relation to pension benefits of prior years, would be viewed as a "qualifying amount" eligible for retroactive averaging of income tax payable.

The payer of the qualifying amount should provide a completed Form T1198, Statement of Qualifying Retroactive Lump-Sum Payment, to each payee and each payee must attach the form with his or her personal tax return for the year the Payment is received and a deduction under subsection 110.2(2) of the Act is claimed. The Canada Revenue Agency (the "CRA") will not use this special calculation if the tax payable under section 120.31 of the Act is more than the tax payable without the section 110.2 deduction. In other words, if the tax payable is lower when the Payment, the qualifying amount, is included in income in the year of receipt, the CRA will assess the lower amount.

We trust our comments will be of assistance to you.

Yours truly,

Lita Krantz CPA, CA
for Director,
Deferred Income Plans, Section II
Financial Industries and Trust Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch