The Form T1198 – Statement of Qualifying Retroactive Lump-Sum Payment is a form you submit to the Canada Revenue Agency (CRA) if you received a lump sum payment and would like them to complete a special tax calculation that takes into account the unusual nature of this lump-sum payment.
What is a Qualifying Lump-Sum Payment?
Certain retroactive lump-sum payments totalling $3,000 or more (not including interest) are considered to be Qualifying Retroactive Lump-Sum Payments. These payments may be eligible for a special tax calculation when an individual files their Income Tax and Benefit Return, regardless of the amount of tax that was withheld from the payment. Although the qualifying lump-sum is given to you in a single year, it may relate to several prior tax years. The CRA allows you to treat this lump sum as if you received it spread out over a few past years so that you do not have an undue tax burden in the year you receive the lump-sum. Instead, they will calculate the amount of income tax, CPP and EI you should pay on the lump sum as if it were added on top of what you made in the relevant years.
Qualifying payments include the following:
- Lump-sum as ordered by a court or other competent tribunal
- Arbitration award
- Lawsuit settlement agreement (including damages for loss of office or employment)
- Benefits from Employment Insurance (EI)
- Support payments such as spousal support or child support
- Benefits from a wage loss replacement plan
- Canadian Forces members’ and veteran’s income replacement
In order to be considered for this special tax calculation, the lump-sum payment you receive must be over $3,000 and must have been paid after 1994 (formerly it was 1977).
Do All Lump-Sum Payments Qualify for This Special Calculation?
Qualifying lump-sum payments cannot be from:
- legal expenses,
- salary reimbursements,
- reimbursements of disability payments,
- repayments of pensions or benefits, or
- deductions of social assistance payments or worker’s compensation benefits.
You could also receive a lump-sum payment from the following which do not qualify:
- Child support arrears: If your spouse failed to pay child support for several years when they are ordered to pay it you may receive it as a lump sum.
- Compensation payments: Compensation for victims of crime is just one example.
- Divorce settlements: Settling property with your former spouse may result in a lump sum.
- Lottery winnings: Not all lottery winnings are lump sum, but many are.
- Retroactive pension payments: You may receive lump-sum payments for a deceased spouse or common-law partner’s pension.
- Insurance settlements: You may directly receive a lump sum for benefits from an insurance company.
How Do I Complete Form T1198?
The organization or person who paid you the lump-sum payment must complete Form T1198 for you. The form requires them to break down how much of the lump-sum relates to each year. They will also need to include your personal information, including your Social Insurance Number (SIN). Lastly, they must also include the reason for the lump-sum payment and the year it was paid to you. Then, you need to attach the form to your tax return.
You should receive an information slip from the payee that details the lump-sum. That slip might be a T4, T4A or T4E. If the lump-sum was given by your employer, along with the slip you should receive written information about the year the payment was made, why it was made, the total amount received plus interest (if any) and which amount of the payment relates to each year.
Unfortunately, when you are reporting a Qualifying Lump-Sum Payment you must submit your taxes in paper form, not electronically.
How Does the Retroactive Calculation Work?
Typically, receiving a large sum of money could have large tax implications, resulting in you paying a great deal of tax. As the lump-sum you received relates to several years (and in some cases should have been given to you over those years, as in child support payments), the CRA is willing to calculate the tax for the lump-sum as if you had received it in several smaller payments over the relevant prior years.
The CRA will not adjust your previous tax years but will calculate the amount of tax to be paid on your lump-sum as if it were spread out over those years. Additionally, the CRA will calculate CPP and EI as well as income tax on the amount. If your employer is the source of your lump-sum payment they may have already withheld some of this tax according to the CRA’s rules for withholding rates for lump-sum payments.
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