Principal Issues: 1. Whether retroactive salary increases resulting from a collective agreement are qualifying amounts for purposes of reporting on Form T1198 “Statement of Qualifying Retroactive Lump-Sum Payment”.
Position: 1. No.
Reasons: 1. These payments do not fall under any of the categories described in the definition of "qualifying amount" in subsection 110.2(1) of the Act.
November 17, 2021
Wynn Coates Business and Employment Division A/Junior Policy Analyst Income Tax Rulings Directorate Indigenous Affairs Section Ananthy Mahendran Federal, Indigenous and Quebec Affairs Division XXXXXXXXXX Service, Innovation, and Integration Branch
2021-090964
Lump-sum retroactive salary increases resulting from a collective agreement
This is in response to your email of September 10, 2021, seeking confirmation as to whether retroactive salary increases resulting from a collective agreement are qualifying amounts for purposes of reporting on Form T1198, Statement of Qualifying Retroactive Lump-Sum Payment (endnote 1) .
Based on the information submitted, we understand that the XXXXXXXXXX members have signed a new collective agreement with retroactive salary revisions from 2017 and they will be receiving large salary revision lump-sum payments in 2021 or 2022. The First Nations XXXXXXXXXX members are asking for the XXXXXXXXXX pay office to complete Form T1198 so that they can apply to the Canada Revenue Agency (CRA) to have the payments taxed as if they had been received in the previous years in which the members may have been eligible for the income tax exemption under section 87 of the Indian Act.
Our Comments
Sections 110.2 and 120.31 of the Income Tax Act (Act) may provide relief to certain individuals who receive taxable lump-sum payments from their employer relating to services that were performed in prior years. Under these provisions, if the individual’s current tax liability under Part I of the Act in respect of a lump-sum payment is higher than it would have been if each portion of the payment had been taxed in the particular year to which it relates, the individual’s tax liability is essentially computed based on the lower amount of notional Part I tax.
More specifically, in computing taxable income for a tax year, section 110.2 of the Act permits individuals to deduct 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 (excluding interest). In addition, the portion of qualifying amount must relate to an “eligible taxation year”. Each of these terms is defined in subsection 110.2(1) of the Act. In order to qualify for this treatment, the payment must be one of the types described in the definition of “qualifying amount” in subsection 110.2(1) of the Act.
For the purposes of this special tax calculation a qualifying amount is defined, in part, as a lump-sum amount that is included in the individual’s income for the year and is received pursuant to:
1. an order or judgment of a competent tribunal,
2. an arbitration award, or
3. a contract by which the payor and the individual terminate a legal proceeding (including amounts received as damages)
In our view, a lump-sum amount that is received as part of the normal collective bargaining process would not be a qualifying amount, and therefore would not be reported on a T1198. However, where a particular lump-sum amount is paid to the individual as the result of an arbitration award resulting from a bona fide arbitration process, such a lump-sum amount could be a qualifying amount. This could apply even when the arbitration process is part of a normal collective bargaining process.
Based on the information provided by the XXXXXXXXXX, the lump-sum retroactive salary payment will be received as part of the normal collective bargaining process, and therefore would not be a qualifying amount and not reported on Form T1198. Consequently, the lump-sum payment received by an XXXXXXXXXX member will be taxed at the applicable tax rate in the year it is received. For those XXXXXXXXXX members who are registered or entitled to be registered under the Indian Act, the lump-sum payment will be exempt from income tax under paragraph 81(1)(a) of the Act and section 87 of the Indian Act, only if the payment is situated on a reserve in the year of receipt. The courts have established that whether income is situated on a reserve, and exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each factor. See Indian Act Exemption for Employment Income Guidelines (endnote 2) to determine if the lump-sum payment would be situated on a reserve in the year of receipt.
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. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure.
We trust these comments will be of assistance to you.
Yours truly,
Ms. Nerill Thomas-Wilkinson, CPA, CA
Manager
Non-Profit Organizations and Indigenous Issues Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1198/t1198-21e.pdf
2 https://www.canada.ca/en/revenue-agency/services/indigenous-peoples/indian-act-exemption-employment-income-guidelines.html
UNCLASSIFIED