You may pay a retiring allowance to your employee.

Your income tax deductions and reporting requirements will differ depending on your employee’s residency status in Canada (resident or non-resident of Canada) and on whether you directly transferred amounts from the retiring allowance to a registered pension plan (RPP) or a registered retirement savings plan (RRSP).

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• Steps
• References

Steps

1. Determine if the payment is considered a retiring allowance

   Retiring allowances are amounts paid to officers or employees on or after they retire from an office or employment, in recognition of long service or for the loss of an office or employment.

   1. The following payments are considered to be retiring allowances:

      • Payments for unused sick-leave credits on termination
      • Amounts received when their office or employment is terminated, even if the amount is for damages (wrongful dismissal when the employee does not return to work)
      • Payments made after retirement or termination in recognition of service

      What is not considered a retiring allowance

      A retiring allowance does not include:

      • Salary, wages, bonuses, overtime, and legal fees
      • Salary continuance
      • Superannuation or pension benefit
      • Amount an individual receives as a result of an employee's death (these payments may be treated as death benefits)
      • Benefit derived from certain counselling services
      • Payment for accumulated vacation leave not taken before retirement
      • Wages in lieu of termination notice
      • Damages for violations or alleged violations of an employee's applicable human rights awarded under human rights legislation, to the extent these amounts are not taxable

      Learn more: Income Tax Folio S2-F1-C2, Retiring Allowances

      
      

      • If the payment is not considered a retiring allowance, do not continue to the next step.

        Refer to: Determine the tax treatment of payments other than regular employment income

      • If the payment is:

        • Wages in lieu of termination notice or damages for loss of employment, continue to: Step 1b – Review if the full payment is considered a retiring allowance
        • Paid exclusively as damages for loss of employment and does not include any portion representing wages in lieu of termination notice, it is generally considered a retiring allowance. Continue to: Step 2 – Determine if your employee is eligible to directly transfer the retiring allowance
   2. Review if the full payment is considered a retiring allowance
      
      • If you made a lump sum payment which includes wages in lieu of termination notice and damages for loss of employment, the portion of the payment for:
        
        • Wages in lieu of termination is considered employment income
        • Damages are generally considered a retiring allowance
      • If you made a lump sum payment to your employee and there is no breakdown of the amounts, the full amount would generally be considered a retiring allowance

      • For the portion of the lump sum payments identified as wages in lieu of termination notice, do not continue to the next step for this amount.

        Go to: Payments of wages in lieu of termination notice

      • If the full payment or a portion of the payment is considered a retiring allowance, continue to: Step 2 – Determine if your employee is eligible to directly transfer the retiring allowance

2. Determine if your employee is eligible to directly transfer the retiring allowance

   Your income tax withholding and reporting obligations will be different depending on whether the payment, or the portion of the payment, is considered an eligible or non-eligible retiring allowance.

   Confirm your employee is eligible to transfer all or part of a retiring allowance

   If your employee has years of service before 1996, they may be able to directly transfer all or part of a retiring allowance to an RPP or RRSP.

   Learn more on when you need to report a pension adjustment if you transfer the amount to an RPP: Pension Adjustment (PA).

   How to calculate the amount eligible to transfer

   Use the following to calculate the maximum amount that is eligible to be transferred from the retiring allowance to an RPP or RRSP:

   1. Determine the amount eligible to transfer before 1996

      • Each year or part of a year before 1996 your employee or former employee worked for you (or a person related to you)
      • multiply by $2,000
      • equals Amount eligible to transfer before 1996

   2. Determine the amount eligible to transfer before 1989

      • Each year or part of a year before 1989 of that employment in which none of your contributions to a pension plan or deferred profit sharing plan (DPSP) were vested in the employee’s name when you paid the retiring allowance
      • multiply by $1,500
      • equals Amount eligible to transfer before 1989

   3. Determine the amount eligible for transfer

      • Amount eligible to transfer before 1996
      • plus Amount eligible to transfer before 1989
      • equals Total amount eligible for transfer

      If your employee receives the full retiring allowance in a single year, include this amount on your employee’s T4 slip using code 66.

      If your employee receives the retiring allowance in installments, they can choose how the eligible and non-eligible portions of the retiring allowance are to be applied to the installments for each year.

   4. Determine the non-eligible amount

      • Entire amount of retiring allowance
      • minus Total amount eligible for transfer (result of 2c)
      • equals Total non-eligible amount

      If your employee receives the full retiring allowance in a single year, include this amount on your employee’s T4 slip using code 67.

      If your employee receives the retiring allowance in installments, they can choose how the eligible and non-eligible portions of the retiring allowance are to be applied to the installments for each year.

   Example

   In November 2025, the employer pays their previous employee a retiring allowance in a single payment of $50,000. The employee worked for the employer from 1986 to 2025 (39 years, including part-years of service). The employee is not vested in employer contributions to the employee's RPP or DPSP that were made prior to 1989 or at the time of the employee's termination.

   1. Determine the amount eligible to transfer before 1996

      • 10 years before 1996 that the employee worked for the employer
      • multiply by $2,000
      • equals $20,000, amount eligible to transfer before 1996

   2. Determine the amount eligible to transfer before 1989

      • 3 years before 1989 that the employee worked for the employer
      • multiply by $1,500
      • equals $4,500, amount eligible to transfer before 1989

   3. Determine the amount eligible for transfer

      • $20,000, amount eligible to transfer before 1996
      • plus $4,500, amount eligible to transfer before 1989
      • equals $24,500, total amount eligible for transfer to be included on the T4 slip using code 66

   4. Determine the non-eligible amount

      • $50,000, entire amount of retiring allowance
      • minus $24,500, total amount eligible for transfer (result of 2c)
      • equals $25,500, non-eligible amount to be included on the T4 slip using code 67
   
   

   • If you paid a non-eligible retiring allowance to your First Nations employee related to their tax-exempt income, the non-eligible amount must be included on the T4 slip using code 69 instead of code 67. Do not continue to the next step.

     Go to: Payments to First Nations workers

   • If the employee is not a First Nations employee, continue to: Step 3 – Determine which deductions you need to withhold

3. Determine which deductions you need to withhold

   You must withhold the following deductions:

   • Income tax - Withhold, from the portion you pay directly to your employee, not including any portion directly transferred to an RPP or RRSP
   • CPP contributions - Do not withhold
   • EI premiums - Do not withhold

   Special situation: Portions of a retiring allowance directly transferred to an RPP or RRSP
   

   • Eligible retiring allowance

     If the eligible retiring allowance is directly transferred to an RPP or RRSP, you do not withhold income tax on this portion of the retiring allowance.

     Only the eligible portion of a retiring allowance can be contributed to an RRSP if the contributor is also the annuitant. In this case, the transfer is completed regardless of their RRSP room available.

   • Non-eligible retiring allowance

     If the non-eligible retiring allowance is transferred to the employee’s RPP or RRSP or a spousal or common-law partner’s RRSP, do not withhold income tax on this portion of the retiring allowance.

     This amount cannot be more than the employee’s available RRSP deduction limit for the year.

     You do not need a letter of authority from the CRA to reduce the tax withheld from the amounts of the payment that were transferred to your employee's RRSP if they gave you a written statement saying the amount is within their RRSP deduction limit.

   
   

   You must deduct income tax from any part of the retiring allowance you pay directly to your employee or former employee depending on their residency status:

   • Canadian resident

     You must calculate using the withholding rate that matches your employee’s total amount of retiring allowances 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 under the Income Tax Act, unless a tax treaty between Canada and that country reduces this rate

     Learn how to calculate income tax deductions for retiring allowances (considered a lump sum payment) using the Non-resident tax calculator.

4. Report the payment on a slip

   You must report payments on a T4 or NR4 slip depending on your employee’s residency status:

   • Canadian resident

     You must report the following amounts on a T4 slip:

     • Code 66 – Eligible retiring allowances
     • Code 67 – Non-eligible retiring allowances

     Learn more: T4 slip – Information for employers

   • Non-resident of Canada

     You must report the following amounts on a NR4 slip:

     • Box 16 or 26 – Gross income
     • Box 18 or 28 – Exemption code

     Learn more: NR4 slip – Statement of amounts paid or credited to non-residents of Canada

References

• Income Tax Folio S2-F1-C2, Retiring Allowances
• ARCHIVED - Damages, Settlements and Similar Receipts

Legislation

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