Lump sum and income tax

I know this has been questioned before, but I am unable to find the link. I receive LTD and CPPD. I also was approved for the DTC. This year, I must claim the lump sum payment provided by CPPD post approval. I never actually received that money as it went directly to Blue Cross (LTD provider). However, it seems as tho it is going to leave me owing over $4000 in taxes. I do have an accountant who does my taxes and she is under the understanding that as my LTD is not taxable, I cannot claim this lump sum as a deduction. Any way around this or advice? Thanks

Make sure the lump sum is taxed for the years it should have been received in.

I have heard it is automatic too but it can’t hurt to check with CRA.
I seem to remember you have to do a paper return (no netfile).
Maybe there is a form to include.
I would definitely include a note.

Hi Mjban, This is a complicated topic and the tax impact will depend on the individual and their specific tax situation in the year they receive the CPPD backpayment and the years the CPPD backpayment covers. You really need professional tax advice on this topic from somebody who knows you and your specific situation. It’s quite risky to take any input from anonymous posters on the internet.

So, here’s some anonymous input from a person who might know nothing at all about tax and certainly nothing about you or your situation! Here’s my understanding of your situation.

You will know whether your Blue Cross LTD is taxable or not based on whether Blue Cross deducts income tax from your gross LTD payments and sends you an annual T4A form. I’m sure your accountant checked the Canada Revenue site and found that Blue Cross does not submit any T4A forms for you and therefore concluded your LTD is not taxable.

Your CPPD backpayment is fully taxable to you and your ongoing CPP Disability monthly payments are fully taxable to you. Since your LTD payments were never taxed, your CPPD backpayment reimbursed to Blue Cross cannot be deducted on your income tax return. The gross amount of the CPPD backpayment reimbursed to your LTD insurer can only be deducted on your taxes where a person paid tax on the LTD payment to start with and is now reimbursing the LTD insurer for an amount they previously paid income tax on (you will not pay income tax on the same $ twice). It doesn’t really matter that you didn’t see the backdated CPPD lumpsum that was paid directly to Blue Cross. This backdated lumpsum was a “debt” that you owed to Blue Cross… Don’t get mad at me! I know it sounds unfair, but the LTD plans/contracts are consciously designed up front to offset CPP payments and you or your union/employer need to buy a MUCH more expensive plan if you don’t want this offset.

It’s possible that your main source of income in 2018 and prior years was your non-taxable LTD payments from Blue Cross, resulting in a low tax liability in 2017 and prior years and then a big jump in tax liability ($4,000) in 2018 due to the CPPD backpayment plus the taxable monthly CPPD payments. If that’s the case, CRA will do a special calculation for you to treat the backdated lump sum as if it was received over the years it was effective. CRA doesn’t reassess your prior tax years. CRA simply does a special calculation to make sure you aren’t penalized from an income tax perspective. Prior to 2018, this “special calculation” required you to submit your tax form manually. This might have changed for the 2018 tax year. Your accountant probably knows how to request this calculation, or if it will even help you, since they knew that you couldn’t deduct the CPPD backdated lump sum from your non-taxable LTD.

Here’s an interesting tidbit for you … even if somebody forgets to ask CRA to do a special calculation for a CPPD backdated lumpsum… CRA might eventually do it anyway, even if it takes a couple of years!!! As many people know, CRA has an audit program for all kinds of things - usually to catch income that people don’t declare, or to verify deductions that people claim on their electronic tax returns. Well, it might be hard to believe, especially based on the negative information you hear or read on-line, but it seems CRA does sometimes try to help disabled people who might be overpaying their income tax! It happened to me. I didn’t ask them to do a “special calculation” since I knew I would not benefit from a special calculation and I did not want the hassle of doing a manual tax return. A couple of years later, out of the blue, CRA re-assessed an old tax return. I nearly had heart failure. I picked myself up off the floor, opened the notice and read “Your Canada or Quebec Pension Plan lump-sum benefit qualifies for a special tax calculation. If it benefits you, we tax any amount of $300 or more for previous years as though you received it in those years rather than in the year you actually got it. However, we determined that this special calculation does not help you and left the full amount of the payment in this year’s income.” I bet that particular CRA audit program helped some disabled folks!!! They were trying to help me. Wasn’t that nice?

I hope you don’t owe $4,000 in taxes.

My assessment once corrected my claim resulting in a higher refund.
So the CRA is not all bad. :slight_smile: