Form T1198: A Technical Interpretation of QRLSPs
By: Ken Lee | KLee Tax and Financial Services Co.
Published: 11 April 2025 4:55PM EST (Updated 17 April 2025 8:50AM EST)
Photo Credit: CPA British Columbia
This article is not part of the regular 'MaxMillions with Ken' series, and is intended to provide subject specific guidence to interested parties. All references to the ‘Act’ mean the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended. All references to the ‘Regulations’ mean the Income Tax Regulations. The following should not be construed as legal nor tax advice. Consultation with your usual tax/legal professional is advised.
Good evening Toronto! The Bill 124 settlement provided a retroactive raise to Ontario public sector workers, paid out as a lump sum payment in the 2024 tax year. As such, affected employees received either Form T1198, Qualifying Retroactive Lump-Sum Payment (QRLSP), or a letter with the equivalent information. This article explains the calculations of T1198 and offers a technical interpretation of its ramifications.
T1198 (or the letter) contains information on how the LSP relates to the current and previous tax years, along with any associated interest. Any amounts listed that were included on T1198 will have also been included on the taxpayer’s 2024 T4 slip. The taxpayer may elect to include the form on their tax return. Regardless of the option chosen (as explained below), they are still liable to pay income tax, EI, and CPP on these amounts.
To that end, there are two options in claiming the income with T1198. The first option would be not to attach it to the return. In this case, the lump sum will be treated as if it were solely earned in the tax year it was paid – in this case, 2024.
If attached to the return, the CRA will perform an alternative calculation. In this scenario, the portion of the LSP allocated to the previous taxation year (as per the letter) will be split and assessed as if it were earned in the respective past year. As part of this, any taxes owing on the reallocated amount will be ‘brought forward’ and added to the 2024 return’s balance. No NOAs/NORs are issued for the previous years as part of this assessment. Importantly, the taxpayer will be required to pay interest from that year to the current year. See ITA §120.31(3).
For example, suppose Remi received a QRLSP of $16,000 in 2024, with $5,000 each for 2022, 2023, and 2024. The remaining $1,000 is interest. To simplify the calculation, we will assume she made $110,000 in each taxation year. In the case of the 2024 tax year, this amount does not include the lump sum.
- If Remi does not elect to include T1198, her income in 2024 will be $126,000, including the lump sum.
- If she includes T1198, her income would be assessed as if it were $115,000 for 2022 and 2023 and $116,000 (including the retroactive payment and $1,000 interest) in 2024.
Due to the generally low amounts (in ratio to salaries) of the settlement, the alternative calculation generally will result in a similar or worse result (due to interest charges) over not including it. Regardless, it should be included, as the CRA confirmed* that it would only apply the calculation if it is beneficial to the taxpayer.
*Editor's note: This letter is from 2009, but the CRA has reconfirmed in an email to KLee Tax that they continue to apply the 'better-of-two' policy.
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