Principal Issues: [TaxInterpretations translation] (1) Does section 110.2 of the Income Tax Act apply to lump sums received under paragraph 56(1)(v)?
(2) Will the inclusion of such amounts in the taxpayer's income for the year in which they are received result in a reduction of the Goods and Services Tax Credit and the Canada Child Benefit?
Position: (1) No. Section 110.2 does not apply where an amount may be deducted by virtue of paragraph 110(1)(f).
(2) Yes. The Goods and Services Tax Credit and Canada Child Benefit amounts are based on "adjusted income", which is a concept based on net income and not taxable income.
Reasons: The Income Tax Act. Jurisprudence.
May 12, 2006
XXXXXXXXXX Tax Services Office Headquarters XXXXXXXXXX François Bordeleau Personal Services Officer 952-1506
2006-018478
Request for Technical Interpretation - Workers' Compensation
Lump Sum Workers' Compensation Benefits
This is further to your letter of December 5, 2005, asking whether an amount received by the taxpayer pursuant to Article 1619 of the Civil Code of Quebec (C.C.Q.) constitutes an amount of interest to be added to the taxpayer's income.
This is further to your letter dated May 4, 2006, in which you requested a technical interpretation regarding the application of section 110.2 of the Income Tax Act (the "Act") to a lump sum payment made as a result of a work-related injury. You also question whether the receipt of such an amount may reduce the amount of assistance provided to the recipient through the Goods and Services Tax Credit ("GSTC") and the Canada Child Tax Benefit ("CCTB").
RELEVANT FACTS
Your request for a technical interpretation states the following facts:
- In XXXXXXXXXX, the taxpayer received a lump sum workers' compensation payment in the amount of $XXXXXXXXXX;
- In XXXXXXXXXX, the taxpayer received a second lump sum payment - identical in nature to the first - in the amount of $XXXXXXXXXX;
- In XXXXXXXXXX and XXXXXXXXXX, the payer of the amounts prepared the T5007 statement in respect of the amounts in question;
- The taxpayer included the lump sum amounts in income for the years in question pursuant to paragraph 56(1)(v) and claimed the offsetting deduction under subparagraph 110(1)(f)(ii);
- The inclusion of these amounts in the taxpayer's income for the years XXXXXXXXXX and XXXXXXXXXX resulted in a reduction of the GST and CCTB amounts.
QUESTION
In your letter, you wish to ascertain whether section 110.2 - providing for the averaging of certain lump sum amounts - applies to amounts received by the taxpayer in XXXXXXXXXX and XXXXXXXXXX. You also wish to ascertain whether the inclusion of those lump sum amounts in the taxpayer's income should result in a reduction of the GSTC and the CCTB paid to the taxpayer under the Act.
ANALYSIS
(1) Averaging a lump sum
The provisions of section 110.2 provide that a taxpayer may benefit from the deferral of lump sums received on account:
- income from an office or employment received under:
- an order or judgment from a court or other competent tribunal
- an arbitration award
- a lawsuit settlement agreement (including damages for loss of office or employment)
- benefits from unemployment insurance or employment insurance
- benefits from a superannuation or pension plan (other than non-periodic benefits such as lump-sum withdrawals)
- spousal, common-law partner, or taxable child support payments
- benefits from a wage-loss replacement plan.1
However, the definition of "qualifying amount" in subsection 110.2(1) provides that a taxpayer cannot benefit from the averaging of a lump sum if, in respect of the amount, the taxpayer is entitled to a deduction under paragraphs 8(1)(b), (n) or (n.1), 60(n) or (o.1) or 110(1)(f).
On the facts of this case, we are of the view that the lump sums came within paragraph 56(1)(v) and were properly included in the taxpayer's income under that provision.
Consequently, we are of the view that the taxpayer cannot benefit from the provisions of section 110.2 since the inclusion of the lump sum amounts in XXXXXXXXXX and XXXXXXXXXX under paragraph 56(1)(v) entitled the taxpayer to claim the offsetting deduction under subparagraph 110(1)(f)(ii).
(2) Reduction of GSTC and CCTB.
The GSTC is calculated on the basis of tax payable for a year and then paid in quarterly instalments in the following year, beginning in July. An individual's eligibility for the GSTC is based on the individual’s "adjusted income", as defined in subsection 122.5(1), which includes the individual's net income and the net income of the individual’s qualified relation.
As confirmed by the jurisprudence,2 the expression "adjusted income" refers to the concept of net income and not to taxable income. In that regard, it is necessary to turn to section 3 of the Act which provides a description of the items to be included in computing a taxpayer's net income for a taxation year.
Among the items to be included in an individual's net income are those described in subdivision d of Part I of the Act, including compensation received under a workers' compensation act of Canada or a province in respect of injury, disability or death.3 The offsetting deduction for that income - provided for in paragraph 110(1)(f) - is included in computing the individual's taxable income, not the individual’s net income. In this case, for the purpose of calculating the taxpayer's "adjusted income" - for the purpose of determining the taxpayer's eligibility for the GSTC - the lump sum amounts received by the taxpayer will be included in the taxpayer's income while the offsetting deduction will be ignored.
With respect to the CCTB, the CCTB is based on the "adjusted income" of a taxpayer or the taxpayer’s spouse or common-law partner, a concept that is also based on net income and not on taxable income. Thus, lump sums received by the taxpayer in XXXXXXXXXX and XXXXXXXXXX will be added to the taxpayer's net income without regard to the offsetting deduction in paragraph 110(1)(f).
Consequently, we are of the view that the lump sums that were included in the taxpayer's income for the XXXXXXXXXX and XXXXXXXXXX taxation years correctly resulted in a reduction in the amounts of the GSTC and CCTB paid to him.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
François D. Bordeleau, LL.B.
Individuals, Business and Partnerships Section
Income Tax Rulings Directorate
ENDNOTES
1 See the definition of "qualifying amount" in subsection 110.2(1) of the Act and the T1198 Guide, Statement of Qualifying Retroactive Lump-Sum Payment.
2 Diquinzio v. Canada, [2000] T.C.C. no 686
3 See paragraph 56(1)(v) of the Act.