Principal Issues: Can a lump-sum employment equity payment awarded by the Canadian Human Rights Tribunal be taxed as though it was received in the year the payment relates to, or does it need to be taxed in the actual year it is received?
Position: In this case, yes it can be taxed as though it was received in the year it relates to.
Reasons: Sections 110.2 and 120.31 of the Act together provide for a lump-sum employment equity payment relating to prior years to be taxed as if it had been received in the year the payment relates to, as long as all conditions of these provisions are met (e.g. payment satisfies the definition of "qualifying amount") and the taxpayer files Form T1198.
XXXXXXXXXX
January 15, 2013
Dear Colleague:
Thank you for your correspondence of November 21, 2012, about the taxation of a lump-sum settlement for pay equity awarded by the Canadian Human Rights Tribunal and received by your constituent, XXXXXXXXXX.
Individuals must include lump-sum settlements for pay equity and any related interest in their income in the year they receive the settlement. However, a rule that applies to retroactive employment income payments (excluding the interest portion) may give individuals some tax savings. This rule allows the Canada Revenue Agency (CRA) to perform a special tax calculation if the part of the retroactive pay equity settlement excluding interest that relates to previous years is $3,000 or more and the individual was resident in Canada during those years.
Under the special tax calculation, the CRA will reduce an individual's taxable income for the year he or she received the lump-sum payment by the part of the payment that relates to previous years. It then calculates tax on the reduced taxable income in the usual way and adds a tax adjustment for the part of the payment that relates to previous years. The tax adjustment includes:
- the additional tax an individual would have paid in each of the previous years if he or she had received the retroactive pay equity employment income in those years; and
- a notional amount of interest for each of those previous years to take into account the additional tax that was not paid during those years.
The CRA will apply this rule only when it is advantageous to the individual. The employer should fill out Form T1198, Statement of Qualifying Retroactive Lump-Sum Payment, and XXXXXXXXXX must send it with her return for the year in which she received the lump-sum amount.
I trust my comments will help you respond to XXXXXXXXXX.
Yours sincerely,
Gail Shea, P.C., M.P.
Phyllis Waugh
905-721-5221
2012-047235