Retiring Allowance

Transcript

Hello, I'm Anthony, your host for today.

Let's begin by acknowledging that the land on which I am located is the traditional unceded territory of the Algonquin Anishnaabeg People. The Algonquin peoples have lived on this land since time immemorial.

We are grateful to have the opportunity to be present in this territory. Given that we are meeting virtually, I also want to acknowledge the lands on which you are gathered

from coast to coast and invite you to take a moment to acknowledge the territory in which you find yourself.

Welcome to Retiring Allowance.

This webinar will be of interest to you if you are an employer paying or planning to pay a retiring allowance, or an employee or former employee receiving a retiring allowance.

Let's get started.

Today, we'll talk about:

• What is a retiring allowance
• What is not a retiring allowance
• How retiring allowances are paid
• How eligible amounts may be transferred to a registered retirement savings plan or a registered pension plan
• What employers must withhold and report

A retiring allowance is an amount paid to an officer or employee on or after retirement in recognition of long service, or an amount paid for the loss of an office or employment. It may also be called severance pay. A retiring allowance may be paid as a lump sum or in instalments.

A retiring allowance can also include:

• unused sick leave credits paid on termination
• amounts individuals receive when their office of employment is terminated even if the amount is for damages
• damages for wrongful dismissal when the employee does not return to work
• in some cases, a payment made by a government agency or a union as compensation for loss of employment

To help determine whether a payment is a retiring allowance in the case of a loss of employment, ask these two questions:

• But for the loss of employment, would the amount have been received
• Was the purpose of the payment to compensate for the loss of employment

The amount received is a retiring allowance only if the answer to the first question is no and the answer to the second question is yes.

If employment is retained or reinstated, damages for lost earnings are generally employment income rather than a retiring allowance.

A retiring allowance does not include:

• salary, wages, bonuses, overtime, and legal fees
• salary continuance
• superannuation or pension benefits
• amounts received because of an employee's death
• certain counselling benefits related to re-employment, retirement, or mental or physical health

A retiring allowance also does not include:

• payments for accumulated vacation leave not taken before retirement
• wages in lieu of termination notice under a contract or minimum standards law
• a retention bonus paid for staying to the termination date
• reasonable human rights or personal injury damages that are unrelated to the loss of employment

More information is available online in Income Tax Folio S2-F1-C2, Retiring Allowances.

Damages awarded for loss of employment can still qualify as a retiring allowance even if they are paid as a result of a court order, judgment, or settlement.

Amounts of damages that are clearly connected to events unrelated to the termination of employment will not qualify as a retiring allowance.

If you had years of service before 1996 and 1989, then you may be eligible to transfer part of your retiring allowance directly to a registered pension plan, a registered retirement savings plan or other instrument. This part is commonly referred to as the eligible portion or the amount eligible for transfer. A retiring allowance may include an eligible portion and a non-eligible portion.

The special eligible amount is calculated as follows:

• $2,000 for each year or part year of service before 1996
• $1,500 is eligible for each year or part year before 1989 in which none of your contributions to a pension plan or deferred profit-sharing plan were vested in the employee's name when you paid the retiring allowance.

The ineligible portion of a retiring allowance cannot be transferred tax free and does not qualify for the special rollover rules.

If a retiring allowance is paid in instalments, the employee can choose how the eligible and non-eligible portions apply to each year's instalment.

Bruno receives a $50,000 retiring allowance.

• He worked for you from 1990 to 2026
• His service began in 1990; there are no years before 1989 for the additional $1,500 calculation

We would calculate the amount of retiring allowance eligible for transfer as follows:

1990 to 1995 = 6 years × $2,000 = $12,000.

Before 1989 = 0 years × $1,500 = $0.

Total amount eligible for direct transfer: $12,000.

If Bruno transfers $12,000 directly to his own RPP, SPP, RRSP, or PRPP, no income tax is withheld on that amount. Remaining non-eligible amount: $38,000. A further transfer is possible only if Bruno has enough RRSP deduction room.

A retiring allowance may still be paid in instalments over a number of years. If interest is paid on unpaid instalments, that interest is not a retiring allowance. It is taxed as interest income. If the employee chooses instalments on or before termination, each instalment is taxable in the year it is received. There is no rule that requires all instalments to be paid within a set period after termination. Withhold income tax from each instalment paid directly to the employee.

Colette is retiring. She is paid a retiring allowance of $35,000 in recognition of long service, of which $12,000 is eligible for direct transfer to an RRSP.

Colette wants you to transfer the total amount of the eligible retiring allowance to her RRSP. She also requests that you transfer another $11,000 using her available RRSP deduction room and gives you a written statement indicating that her RRSP deduction limit is $11,000.

In total, $23,000 is transferred directly to Colette's RRSP.

• No income tax is withheld from the direct transfer
• The employer should identify the eligible and non-eligible portions for reporting purposes

The remaining non-eligible amount is $12,000.

The employer withholds income tax on the amount paid directly to Colette. Do not withhold Canada Pension Plan contributions or Employment Insurance premiums.

A portion of the retiring allowance is eligible for transfer to an RRSP for years of service prior to 1996 with no impact to their RRSP deduction limit.

Report the eligible portion of the retiring allowance on the T4 slip using code 66. Report the ineligible portion of the retiring allowance on the T4 slip using code 67.

For certain First Nations employees, use code 69 for the in-eligible portion related to tax-exempt income.

The employee reports codes 66 and 67 on line 13000 of their personal tax return.

For any amounts not transferred to an RRSP or an RPP, the employer must deduct income tax from these payments.

Note: Retiring allowances must be taxed even if a recipient's total earnings received or receivable during the calendar year, including the lump-sum payment, are less than the total amount claimed on their Form TD1, Personal Tax Credits Return.

Do not deduct Canada Pension Plan contributions or Employment Insurance premiums.

Withhold income tax only on the amount paid directly to the employee.

If an individual dies before receiving all of a retiring allowance, to which they were entitled, any remaining amount received by their dependent, relation or legal representative may retain its character as a retiring allowance under certain circumstances. This amount would not be considered a death benefit.

It is possible that the retiring allowance could be included in the retired employee's income for the taxation year of death as a "right or thing."

Where the individual was contractually entitled to receive a retiring allowance or the employer decides to pay an amount in recognition of their employment services, the amount received after death would be a death benefit.

Receiving benefits, such as health or dental coverage, does not by itself mean that the employee is still employed, because it is common for such plans to cover retirees.

If the individual continues to accrue pension benefits, that indicates a continued employment relationship.

A transfer within the same employer or an affiliate is generally not a loss of employment.

The payment of retiring allowance in installments must be added up for the year as one payment to determine the withholding rate for the year. Withhold income tax only on the portion paid directly to the employee.

For a resident of Canada, the withholding rates are:

• 10% on amounts up to $5,000
• 20% on amounts from $5,001 to $15,000
• 30% on amounts over $15,000

For Quebec, these are only the federal rates of income tax to withhold. The rates are 5%, 10%, and 15%. Consult Revenue Quebec's content for your provincial withholding obligations.

It is possible that an employee receives this payment and is then required to pay more taxes, due to a possible increase in their tax bracket.

To avoid this situation, if the employee requests it, you can do the following:

Calculate the annual tax to deduct from the employee's yearly remuneration, including the lump-sum payment.

This amount gives you the first result.

Calculate the annual tax to deduct from the recipient's yearly remuneration, not including the lump-sum payment. This gives you the second result.

Subtract the second result from the first result.

The end number is the amount you deduct from the lump-sum payment.

Declare this amount as income tax on your employee's T4.

Janani earns $45,000 in regular pay.

Her employer pays a $15,000 retiring allowance directly to her. Because the total retiring allowances for the year are $15,000, the withholding rate is 20%.

Canada Pension Plan contributions and Employment Insurance premiums are not deducted from the retiring allowance.

For a non-resident of Canada, a retiring allowance is generally subject to 25% Part XIII withholding. A tax treaty may reduce that rate.

Report the payment on an NR4 slip using the gross income and exemption code boxes, if applicable.

Today, we discussed:

• What is a retiring allowance
• What is not a retiring allowance
• How retiring allowances are paid
• How direct transfers and instalments work
• What employers must withhold and report

Tax administration is as complex as life itself. If the content today doesn't quite fit your situation, please:

• Visit our web site
• Visit Canada.ca/cra-liaison-officer to get free tax help from a liaison officer.
• Call CRA's business enquiries line at 1-800-959-5525.
• You can also go to canada.ca/cra-videos where you'll find all our business webinars

We've come to the end of our webinar.

Thanks for joining me today. I hope it's been helpful. Stay tuned for more webinars in the coming months!

Goodbye!