T1198: retroactive lump sums of $3,000 or more can be taxed by year

What does the T1198 change about how the payment is taxed?

Without the T1198, the whole lump sum lands in the year your client receives it, at that year's marginal rate. With it, your client can ask the CRA to tax the portions for earlier years as if they had been received in those years, and the CRA applies that only if those portions total $3,000 or more (not including interest) and the result is better for your client canada.ca. The form itself is the payer's statement of the payment, broken down by the years it relates to canada.ca.

The legal mechanics are two sections. Section 110.2 lets an individual (not a trust) deduct the specified portions of qualifying amounts received in the year, but only if they total $3,000 or more laws-lois.justice.gc.ca. Section 120.31 then adds back, for each eligible year, the notional tax: what that year's tax would have been with the portion included, minus the tax actually payable for it laws-lois.justice.gc.ca. The CRA shows the result on the notice of assessment or reassessment canada.ca.

Which retroactive payments qualify, and which do not?

A qualifying amount is the part of a lump sum (other than interest) paid to an individual for one or more earlier eligible years and included in income from an eligible source. An eligible year ended after 1977 and before the year of receipt, your client was resident in Canada throughout it, and it didn't end in a year your client went bankrupt canada.ca.

The collective bargaining line is the one accountants hit most. The CRA says negotiated back pay is not a qualifying amount, but an amount from an arbitration award made through the normal collective bargaining process does qualify canada.ca. Ask the payer which one your client's cheque was.

The Act also excludes any part your client can deduct under paragraph 8(1)(b), (n) or (n.1), 60(n) or (o.1), or 110(1)(f) laws-lois.justice.gc.ca. The CRA puts it in plain terms: legal expenses, salary reimbursements, reimbursed top up disability payments, repaid pension or benefits, and social assistance or workers' compensation that is deducted canada.ca. Those last two come from a T5007 slip.

How much does the special calculation save on a $30,000 award?

Say an arbitrator orders your client reinstated in 2026 with $30,000 of back pay: $10,000 for 2024 and $20,000 for 2025, plus $1,500 of interest. Your client earned little in those two years and is in a 43% marginal bracket in 2026. The rates below are assumptions for the example; your software recomputes each year with its own brackets and credits.

The $1,500 of interest is not a qualifying amount, so it stays in 2026 income under both methods canada.ca. The special calculation saves about $6,830 here, so the CRA applies it. Flip the facts (a client who earned more in 2024 and 2025 than in 2026) and the regular treatment wins, and the CRA leaves the return alone.

Notional tax stacks. If your client got an earlier qualifying amount for 2024 in a prior year, the 2024 calculation subtracts the notional tax already counted for it, so the second payment is taxed on top of the first laws-lois.justice.gc.ca.

When does the CRA add interest, and at what rate?

Interest applies only to eligible years that ended before the year preceding the year of receipt. It runs on the extra tax from May 1 of the year after the eligible year to the end of the year before receipt, at the rate prescribed for subsection 164(3) laws-lois.justice.gc.ca. That's the rate the CRA pays individuals on overpayments: under Regulation 4301(b), the base rate plus 2 points for a taxpayer that isn't a corporation laws-lois.justice.gc.ca.

So for a payment received in 2026, the 2025 portion carries no interest at all, and the 2024 portion carries interest from May 1, 2025 to December 31, 2025. The example's $70 comes from these non corporate overpayment rates:

The rates come from the CRA's quarterly pages for 2025 canada.ca canada.ca canada.ca. As of October 2026 the same rate is 5% for October to December 2026 canada.ca; the full table is on the prescribed interest rates page. For a payment that covers many old years, the interest can eat a real share of the saving, which is why the CRA's comparison sometimes keeps the regular treatment.

What the payer must issue, withhold and report

The CRA's payroll page says the payer must give the recipient either a completed Form T1198 or a letter showing the year of payment, a full description of the payment and why it was required, the total with principal and interest shown separately, and the principal for the current year and each prior year canada.ca. The page sets no deadline for it. A client whose employer only sent a T4 should ask for the T1198 or the letter before filing.

On a QRLSP of employment income, the payer withholds income tax and CPP with the bonus or irregular payments method and EI with the manual calculation method canada.ca. The CRA's retroactive pay page gives the same bonus method treatment for income tax and CPP and the same T4 boxes canada.ca. The flat 10%, 20% and 30% rates apply to regular lump sums, not to these; see the lump sum withholding rates page. Payroll withholding is the same whether or not the special calculation applies later.

On the return, your client reports the entire payment on the normal line for its source (box 018 amounts go on line 13000) and requests the special calculation canada.ca. Electronic filers keep the T1198 in case the CRA asks; paper filers send the T1198 or letter to their tax centre canada.ca.