Lump-sum payments, including qualifying retroactive lump-sum payments

If you make lump-sum payments to a person, you have to report the payments and deductions on a T4A, T4, or NR4 slip.

On this page

• Steps
• References

Steps

1. Determine if the payment is considered a lump-sum payment

   If you make one of the following payments, it is considered a lump-sum payment:

   • Retiring allowances (severance benefit)
   • Death benefits
   • Payments from a registered retirement savings plan (RRSP)
   • Payments from a registered pension plan (RPP)
   • Payments from a deferred profit sharing plan (DPSP)
   • Payments to the original annuitant under a registered retirement income fund (RRIF)
   • Payments from an individual pension plan (IPP)
   • Payments from an amended plan
   • Proceeds from the surrender, cancellation, or redemption of an income averaging annuity contract (IAAC)
   • Direct transfer of a lump-sum payment from an RPP or DPSP
     Determine how you need to report a direct transfer of a lump-sum payment from an RPP or DPSP

     If you make a lump-sum payment that is transferred directly from an RPP or a DPSP to one of the following plans, you do not have to withhold income tax from the payment or report the payment on a T4, T4A or NR4 slip:

     • DPSP, only if the transfer is from another DPSP
     • PRPP
     • RPP
     • RRIF
     • RRSP
     • SPP

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      If the lump-sum payment was transferred directly from an RPP or DPSP to any of the above plans, do not continue to next step. If the lump-sum payment was made to a:

     • Canadian resident

       To record the direct transfer, you can use Form T2151, Direct Transfer of a Single Amount Under Subsection 147(19) or Section 147.3

     • Non-resident of Canada

       To waive the requirement to withhold non-resident tax and report on a slip, you must fill out Form NRTA1, Authorization for Non-Resident Tax Exemption

     Learn more: Transfer of funds

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   •  If the payment is not one of the above (for example, bonuses or wages in lieu of termination notice), it is not considered a lump-sum payment for income tax purposes. Do not continue to the next step.

     Refer to:

     • Bonuses, retroactive pay increases or irregular amounts
     • Payments of wages in lieu of termination notice
     • Determine the tax treatment of payments other than regular employment income

   • If the payment is one of the above, it is considered a lump-sum payment.

      Continue to: Step 2 – Determine if any exceptions apply to the lump-sum payment you make

2. Determine if any exceptions apply to the lump-sum payment you make

   You may have different withholding or reporting requirements if you make lump-sum payments in one of the following situations:

   • Payments of retiring allowances
   • Payments related to the death of your employee
   • Payments to First Nations workers

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   •  If the payment is made in one of the above situations, do not continue to the next step.

     Learn more on the above exceptions using the links.

   • If the payment is not made in one of the above situations, continue to one of the following steps depending on the type of lump-sum payment:

     • Retroactive lump-sum payment: Step 3 – Determine if the payment is a qualifying retroactive lump-sum payment (QRLSP).
     • Other types of lump-sum payments: Step 4 – Determine which deductions you need to withhold from the lump-sum payment.

3. Determine if the payment is a qualifying retroactive lump-sum payment (QRLSP)

   1. If you make a lump-sum payment, it is a QRLSP if all of the following conditions apply:

      • Payment is a qualifying amount
        What are qualifying amounts

        Qualifying amounts

        A qualifying amount is the portion of a lump-sum payment or benefit (other than any interest) that you pay to an individual (other than a trust) in the year that relates to one or more prior eligible tax years. In addition, the payment must be included in the individual's income for the year, provided it is for an eligible source of income.

        Eligible sources of income are:

        • Income from an office or employment received under one of the following:
          • 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, including from a foreign pension plan and Old Age Security (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
        • Canadian Forces members' and veterans' income replacement benefits

        Amounts not qualifying

        An amount received under any part of a retroactive lump-sum payment, that is eligible for any of the following deductions, is not a qualifying amount:

        • Legal expenses
        • Salary reimbursements
        • Reimbursement of top-up disability payments
        • Repayment of pension or benefits
        • Deduction of social assistance payments, workers' compensation benefits

        An amount under normal collective bargaining, such as negotiated back pay, is not a qualifying amount (although an amount received from an arbitration award, under the normal collective bargaining process, does qualify).

      • Payment relates to one or more prior eligible tax years
        What is an eligible tax year

        An eligible tax year is a tax year that meets all of the following conditions:

        • The tax year ended after 1977 and before the year in which the recipient received the payment
        • The recipient was a resident of Canada throughout the tax year
        • The tax year did not end in a calendar year in which the recipient became bankrupt
      • The sum of the payments relating to the eligible tax years is at least $3,000, not including interest (if a person receives more than one type of QRLSP in a year, the $3,000 threshold applies to the total amount of QRLSP, not to each individually)

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      •  If the payment does not meet all of the above conditions, it is not a QRLSP. It is treated as a regular lump-sum payment.

         Continue to: Step 4 – Determine which deductions you need to withhold from the lump-sum payment

      • If the payment meets all of the above conditions, it is a QRLSP.

        You need to provide documents to the recipient so they can request a special tax calculation be applied to their personal income tax return.

         Continue to: Step 3b – Documents you have to provide to the recipient to request a special tax calculation

   2. Documents you have to provide to the recipient to request a special tax calculation

      If the payment is a QRLSP (Step 3a), the recipient can request a special tax calculation be applied to their income tax and benefit return.

      What is the special tax calculation

      Generally, a lump-sum payment is included in income in the year the recipient receives it. This may result in a greater tax liability than if the payment had been received in the year or years to which it related.

      A special tax calculation is available to recipients who receive a QRLSP that relate to any year after 1977. The calculation applies if the total of all principal amounts that relate to prior years (after 1977) from all QRLSPs is $3,000 or more.

      You (as the payer) must provide to the recipient one of the following to help the CRA decide if the special tax calculation is beneficial to them:

      • A completed Form T1198, Statement of Qualifying Retroactive Lump-Sum Payment

      • A letter with the following information:

        • The year in which the lump-sum payment was made to the recipient
        • A complete description of the lump-sum payment and the circumstances that required it to be paid
        • The total amount of the lump-sum payment, including a breakdown between the principal and the interest element, if any, of the payment
        • The principal amount of the lump-sum payment that relates to the current year and each of the previous years covered by the payment

      If the employee requests the special tax calculation be applied to their personal income tax and benefit return:

      • If filing their tax return electronically, they must keep the Form T1198 in case the CRA asks to see it later
      • If they are filing on paper, send Form T1198 or the letter from the payer to their tax centre

4. Determine which deductions you need to withhold from the lump-sum payment

   Depending on the type of payment you made, you must withhold the following deductions from the lump-sum payment:

   • QRLSP

     You must withhold the following deductions from a QRLSP:

     • CPP contributions – Withhold, calculate using the bonus or irregular payments method
     • EI premiums – Withhold, calculate using the any payments (manual calculation) method
     • Income tax – Withhold, calculate using the bonus or irregular payments method

   • Lump-sum payment (other than QRLSP)

     You must withhold the following deductions from a regular lump-sum payment:

     • CPP contributions – Do not withhold
     • EI premiums – Do not withhold
     • Income tax – Withhold, from the portion you pay directly to your employee, not including any portion directly transferred to an RPP or RRSP, unless:
       • The recipient's total earnings received or receivable during the calendar year, including the lump-sum payment, are less than the claim amount on their Form TD1, Personal Tax Credits Return
       • The payment is one of the following:
         • A lump-sum payment (such as a refund of premiums) paid to a deceased annuitant's spouse or common law partner
         • The minimum amount paid out of a RRIF to the original annuitant

       How to calculate the income tax deductions

       You have to calculate the income tax to deduct using one of the following tax rates depending on the recipient’s residency status:

       • Canadian resident

         You must calculate using the withholding rate that matches the recipient’s total amount of lump-sum payments paid or expected to be paid in the calendar year:

         • 10% (5% for Quebec), $5,000 or less
         • 20% (10% for Quebec), $5,001 to $15,000
         • 30% (15% for Quebec), $15,001 or more

         Learn how to calculate income tax deductions for using the lump-sum payments method

       • Non-resident of Canada

         You must calculate using the 25% Part XIII tax rate, unless a tax treaty between Canada and that country reduces this rate

         Learn how to calculate income tax deductions for lump-sum payments using the non-resident tax calculator

5. Report the lump-sum payment on a slip

   You must report the lump-sum payments depending on the recipient’s residency status and the type of income you paid:

   • Canadian resident - Employment income

     If the recipient is a Canadian resident, you must report lump-sum payments that are considered employment income on a T4 slip:

     • Box 14 – Employment income
     • Box 24 – EI insurable earnings
     • Box 26 – CPP/QPP pensionable earnings

     Learn more: T4 slip – Information for employers

   • Canadian resident - Not employment income

     If the recipient is a Canadian resident, you must report lump-sum payments that are not considered employment income on a T4A slip:

     • Pension or superannuation

       • Box 016 – Pension or superannuation

       Lump-sum payments

       • Box 018 – Lump-sum payments, and the applicable code
       • Code 102 – Lump-sum payments made for non-resident services transferred to an RPP, an SPP, a PRPP, or an RRSP and which were eligible to be deducted under paragraph 60(j)
       • Code 108 – Lump-sum payments from an RPP that you cannot transfer
       • Code 110 – Lump-sum payments made out of an RPP and a DPSP accrued to December 31, 1971
       • Code 158 – Lump-sum payments that you cannot transfer that are not reported elsewhere
       • Code 180 – Lump-sum payments from a DPSP that you cannot transfer
       • Code 190 – Lump-sum payments from an unregistered pension plan

     Under the CRA administrative policy, a slip must be issued if the total of all payments in the calendar year was more than $500 or if you deducted tax from the payment.

     Learn more: T4A slip – Information for payers

   • Non-resident

     If the recipient is a non-resident, you must report lump-sum payments on a NR4 slip:

     • Income

       • Box 16 or 26 – Gross income

       Lump-sum payments

       • Code 03 – Other – Lump-sum payments
       • Code 14 – Income-averaging annuity contracts
       • Code 27 – RRIF – Lump-sum payments
       • Code 31 – DPSP – Lump-sum payments
       • Code 40 – Superannuation or pension benefits – Lump-sum payments
       • Code 43 – RRSP – Lump-sum payments
       • Code 66 – PRPP – Lump-sum payments

     Learn more: NR4 slip – Payments made to non-residents

References

Legislation