When T1198 is entered into the tax return the return must be submitted in paper form.
I read CRA’s fillable PDF:
Attach Form T1198, Statement of Qualifying Retroactive Lump-Sum Payment, to your
return for the year of payment to ask for a special tax calculation.
I read following article:
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.
If you’ve had experience with this tax slip how have you communicated this tax scenario to your client? My thoughts are when a taxpayer signs a T183 with a refund/tax amount owing (unless reassessment) they expect that to be the tax amount.
Just tell them that it could be assessed differently but the amount owing would be the maximum owing or the refund will be the least they can expect to receive.
You should be able to determine if there will be a savings looking at the affected years.
If no savings do not bother including.
I had two clients this year with the T1198 form, both employees of Canada Post, working in different departments and not knowing each other. The employee contracts had been renegotiated, thus allowing for retroactive payments affecting prior years where they were working under the terms of an expired contract. In both cases, I verified that the Lump Sum payments were included in Box 14 of their T4 slip.
My first client’s Lump Sum payments were Less Than $3,000, so no further action was required since CRA will not do a review for amounts < $3K. We e-filed that return as normal.
In the 2nd client’s return, the lump sum payment covered more tax years and was > $5,000, which is reviewable by CRA. My first question: would a CRA review be beneficial? This meant assessing whether removing the lump sum payment from this year’s return would result in a move to a lower tax bracket, and it did. I then added this income to the prior year returns to see if that extra income moved those years to a higher tax bracket, and it didn’t. So for this client, I was able to show that my client would benefit by a CRA review.
I explained this process to my client, and he was fine with it. Sometimes clients need their refund and don’t want to wait the extra time for a paper review. In this case, my client recognized the benefit and had no issues waiting. I didn’t take time to do the math, so didn’t give my client an accurate refund amount. We talked in generalities and he was fine with that, and understanding that his refund amount wouldn’t match the amount recorded on his 2020 tax return. I prepared a cover letter to CRA and had my client co-sign this letter.
I have had this with my hubby a couple times. The first time when life was normal it took a VERY long time so when it happened again we just decided to E-file his return as usual with the intention of subsequently submitting the T1198 for adjustment. That was last year so still waiting for a good time to submit the paper doc’s (when the local CRA drop box opens again?).
@kozakworld Just saw the other post you commented on (Qrlsp - t1198)
- This taxpayer - T1198 QRLSP 2020 breakdown:
- Current year = $0.00
- 1st Prior year = $2,XXX.XX
- 2nd Prior year = $1,XXX.XX
Also, they had a QRLSP slip in 2019.
CRA reassessed their 2019 return (done by another tax preparer) and completed the special tax calculation reducing taxpayers 2019 income from 3rd tax bracket to 2nd tax bracket** (refund increased after reassessment).
For 2020 taxpayer - 2nd marginal tax bracket.
2019 - 2nd marginal tax bracket (after CRA assessment)
2018 - 1st marginal tax bracket
Will CRA automatically do what benefits taxpayer with they receive the paper return or are they looking for direction from the preparer?
From the above 2018 has the lowest marginal tax bracket.
Cover letter - what did you write on the cover letter to the CRA?
Couldn’t hurt to include a cover letter but I have usually just affixed the T1198 to the front of the return to make sure it is not missed.
This is a snapshot of my cover letter (removed client name, SIN #, and DOB) which were also included, and used my business letterhead:
Re: T1198 – Statement of Qualifying Retroactive Lump-Sum Payment
Dear Sir or Madam:
Mr. xxx received two T1198 statements from his employer this year for Qualifying Retroactive Lump-Sum Payments. The Total Principal (Prior Year Only) is as follows:
• Statement one: $2,547.49
• Statement two: $3,338.72
Combined total: $5,886.21
Please perform a special tax calculation in order to properly assess the tax associated with this income.
Thank you for your kind consideration.
CRA will automatically do the calculations. The T1198 info sheet specifically spells this out. I simply include the cover letter to make sure they don’t miss looking at the form. @Arliss’s idea to place the T1198 at the front of the package is another way to make sure it isn’t missed. I also like @LMK idea to file as normal and then file an adjustment to correct it. This way the taxpayer isn’t waiting for their initial refund.
Thank you everyone for your responses. I really appreciate your comments!
@kozakworld Thank you for providing your highly detailed responses. The extra detail really helped!
Everyone have a great weekend.