8 December 1997 External T.I. 9725025 - NET FEDERAL SUPPLEMENTS AND PART I.2 TAX

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

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?

Position:

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.

Reasons:

This interpretation is consistent with Assessing's position and the scheme of the Act.

XXXXXXXXXX 5-972502

Attention: XXXXXXXXXX

December 8, 1997

Dear Sirs:

Re: Net Federal Supplements and Part I.2 Tax

This is in response to your letter of August 25, 1997 which was forwarded to us for reply by the Edmonton Tax Services Office. You have asked for the Department's position concerning the application of paragraphs 60(w) and 110(1)(f) of the Income Tax Act (the "Act") in circumstances where a taxpayer who is in receipt of Old Age Security (OAS) benefits and net federal supplements ("NFS") is subject to the Part I.2 tax.

Clause 56(1)(a)(i)(A) of the Act requires a taxpayer to include in income the amount of any pension, supplement or spouse's allowance received under the Old Age Security Act. Paragraph 110(1)(f) of the Act provides a deduction for any social assistance payment made on the basis of a means, needs or income test and included in income under clause 56(1)(a)(i)(A) of the Act. Accordingly, NFS are rendered non-taxable by virtue of paragraph 110(1)(f) of the Act.

Part I.2 of the Act imposes a special tax on a taxpayer who has included in income OAS benefits and NFS to the extent that the taxpayer's income exceeds an indexed threshold. The effect of the Part I.2 tax is to provide for a repayment by the taxpayer of all or part of such benefits. Paragraph 60(w) of the Act allows a deduction for the amount of Part I.2 tax so as to offset the inclusion of such benefits in income.

In the circumstances described, we agree that the provisions of Part I.2 do not expressly provide for an allocation of the Part I.2 tax between OAS benefits and NFS. However, it is the Department's position that the Part I.2 tax is applied to OAS benefits first. If the Part I.2 tax exceeds OAS benefits, the excess will be considered to be a repayment of NFS to the extent of NFS included in income. Since paragraph 110(1)(f) of the Act allows an offsetting deduction for the amount of NFS included in income and paragraph 60(w) of the Act allows a deduction for the amount of Part I.2 tax payable, the amount of NFS that is subject to repayment as Part I.2 tax may in effect be deducted twice. It is our view that subsection 248(28) of the Act would apply to prevent a double deduction in such circumstances. Accordingly, the paragraph 110(1)(f) deduction will be reduced to the extent of the Part I.2 tax that is considered to be a repayment of NFS.

We trust that the above comments will be of assistance.

Yours truly,

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

cc R.A. White
Client Services Division
Edmonton Tax Services Office