Transcript

Hello and welcome to our retiring allowance webinar.

I’m Jackie, your host for today.

For today, please use the question icon in the tool bar at the top of the screen to ask a question related to retiring allowance.

We’ll answer as many as we can during the webinar.

For any other tax related questions, please call the business enquiries line at 1-800-959-7775.

Let’s get started.

Today, we’ll talk about:

• What is a retiring allowance
• What is not a retiring allowance
• How retiring allowances are processed
• How an employer can transfer part or the entire retiring allowance to their employee’s RRSP or RRP.
• What you as an employer must do when providing a retiring allowance such as payroll and deductions

Let’s first start by defining what a retiring allowance is.

A retiring allowance is an amount paid to officers or employees when or after they retire from an office or employment in recognition of long service or as compensation for loss of office or employment. A retiring allowance can be paid in lump-sum or on a periodic basis.

In other words a retiring allowance can be what it sounds like, for when an employee retires, or it can be what most people would call a severance payment or payments/package. if one of your employees has been terminated – through no fault of their own - any payments made to compensate them for this would generally be considered a retiring allowance. A retiring allowance can arise out of, or in consequence of ceasing to be an employee.

A retiring allowance can also include:

• Payments for unused sick-leave credits on termination
• Amounts individuals receive when their office or employment is terminated, even if the amount is for damages such as wrongful dismissal, when the employee does not return to work.

To clarify what is a retiring allowance in the case of loss of employment, there are two questions to ask when wondering whether or not a payment is a retiring allowance. These are:

• If it were not for the loss of employment, would the amount have been received?
• Was the purpose of the payment to compensate a loss of employment?

The amount received is considered a retiring allowance only if: the answer to the first question is “no”; and the answer to the second question is “yes”.

A loss of employment usually refers to the elimination or expiration of a particular office or employment. In short, a retiring allowance is usually given when a loss of employment has occurred, and there was a payment to compensate for this.

Now that we know what a retiring allowance is, let’s talk about what is not a retiring allowance.

• Salary, wages, bonuses, overtime and legal fees
• A superannuation or pension benefits
• An amount an individual receives as a result of an employee’s death
• A benefit derived from certain counselling services
• Payments 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
• For more information on what is not a retiring allowance, see Income Tax Folio S2-F1-C2, Retiring Allowances (paragraph on non-qualifying receipts)

The CRA views severance pay and retiring allowance as one and the same. If your employer is offering severance or if you want to offer severance pay to your employee, tax legislation regarding retiring allowance that we have discussed today, also applies to any severance payments or severance packages.

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 (RPP) or a registered retirement savings plan (RRSP).

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.

Let’s take a look at what amounts are eligible and what amounts are not.

• $2000 are eligible for each year or part of a year before 1996 that the retiree worked.
• $1500 are eligible for each year or part of a year before 1989. It is important to note that amounts during these years are only eligible if no other amounts were paid to a pension plan or deferred profit sharing plan or DPSP) when you paid the retiring allowance.

Let’s take a look at an example.

In February 2021, you pay Bruno, your ex-employee, a retiring allowance of $50,000. He worked for you from 1986 to 2020, a total of 34 years, including part-years of service). He did not contribute to a pension plan or DPSP.

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

• $2000 per year from 1986 to 1996. That means $2000 x 10 years or $20,000.
• $1500 per year from 1986 to 1988. This means $1500 x 3 years, for a total of $4500.

Therefore, the total amount that is eligible for transfer into Bruno’s T4 would be for a total of $24,500.

Bruno is allowed to transfer $24,500 directly into an RPP or his RRSP with no tax deductions required.

The non-eligible amount of $25,500 which is obtained by subtracting his eligible amount from his total retiring allowance of $50,000 can also be transferred directly from Bruno’s RRSP. However Bruno must provide a written statement to his employer, explaining that the $25,500 is within his RRSP deduction limit.

It is important to note that any amounts of a retiring allowance gained in years in 1996 or later, can no longer be transferred to an RPP or RRSP.

Let’s take a look at another example.

Colette is retiring. She is paid a retiring allowance of $35,000 in recognition of long service, of which $12,000 is eligible for 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 an additional $11,000 to her RRSP and gives you a written statement indicating that her RRSP deduction limit is $11,000.

We first add the amounts being transferred to Colette’s retiring allowance that will be transferred directly to her RRSP.

So, $12,000 + $11,000 which would equal $23,000. This amount would be transferred to Colette’s RRSP with no deductions.

This leaves us with $12,000 of a non-eligible amount of retiring allowance for transfer to an RRSP. This amount can be paid directly to Colette with the appropriate income tax deductions.

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 Colette’s RRSP because she gave you a written statement.

If an employee worked years of service on or after 1996 and receives a retiring allowance those years, they are unable to transfer it to their RRSP.

In that case, an employee can choose to have their retiring allowance received in one lump-sum payment, or spread out in multiple different years.

This can benefit both the employer and the employee as the employer can have more time to pay the retiring allowance, and the employee can take advantage of the graduated tax rates and ensure they are not taxed at the highest tax bracket.

An employer would report a retiring allowance on the T4 slip.

The employer would report the eligible portions of a retiring allowance on box 66. When we say eligible, we mean amounts eligible to be transferred to an RRSP or RRP.

The employer would report the non-eligible portion of the retiring allowance on box 67.

An employee would report any amounts not transferred to an RRSP on line 13000 of their personal tax return.

For any amounts not transferred to an RRSP or an RRP, then the employer must deduct income tax from these payments. However, it is important to note to not deduct CPP or EI from any retiring allowance payments.

If an individual dies before receiving all of a retiring allowance 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 can be included in the retired employee’s income for the taxation year of death as a “right or thing”. For more information on Right or thing, please see guide T4011, Preparing Returns for Deceased Persons.

It is also important to note that receiving benefits, such as health or a dental plan does not indicate that an individual has not retired – or that employment has not terminated – as it is common for such plans to provide coverage to retirees.

However, if the individual continues to accrue pension benefits, this implies that there is a continued employment relationship, as pension benefits only accrue to employees. The fact that an employer does not require an individual to report to work is not determinative of whether the individual has retired. For example, an individual could have been given a leave of absence for educational purposes and would otherwise still be considered an employee.

If an employee receives an amount that qualifies as a retiring allowance from someone else than his employer, for example, as compensation for loss of employment following the employer’s insolvency, that amount will not, in and of itself, be disqualified from being a retiring allowance.

For example, a government agency or union may make payments to former employees of an insolvent employer as compensation for loss of employment.

However, such a payment would not qualify for the RRSP transfer.

If a retiring allowance payment is made in one payment and is not transferred to an RRSP, then it would be considered a lump-sum payment. The lump sum withholding rates or tax rates, are:

• 10% (5% for Québec) on amounts up to and including $5000
• 20% (10% for Québec) on amounts over $5000 up to an including $15,000.
• 30% (15% for Québec) on amounts over $15,000.

As mentioned before, do not deduct CPP or EI premiums from the retiring allowance.

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. For more information on how to do a step-by-step calculation of tax deductions, see guide T4032 – Payroll Deductions Tables of your province or territory. 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.

Linda made $45,000 in Ontario in 2021. She is required to pay $6,067 in income taxes.

Her employer wants to provide her with a retiring allowance of $15,000. This would bring her total remuneration for the year to $60,000 and her total tax bill to $10,211. Linda asks that her employer deduct the income taxes from her retiring allowance.

Her employer subtracts the $6,067 from the $10,211 and arrives at $4,144. He subtracts this amount from the $15,000 as income tax and gives Linda $10,856. Linda will not have to pay any additional income taxes at the end of the year.

If you are paying a retiring allowance to a non-resident of Canada the rates are different. Withhold 25% of the retiring allowance (the withholding rate may vary depending on the applicable tax convention or agreement).

Send this amount to the Receiver General on the non-resident’s behalf. For more information, see Guide T4061, NR4 – Non Resident Tax Withholding, Remitting, and Reporting.

We are nearing the end of the webinar. Let’s recap. Today, we discussed :

• What is a retiring allowance
• What is not a retiring allowance
• How retiring allowances are processed
• How to transfer a portion of your retiring allowance to an RRSP or RRP
• The tax obligations for employers surrounding retiring allowance

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.

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