Question

The Payroll Administrator, Bradley Sullivan, has approached you for guidance on calculating the eligible and non-eligible retiring allowance amounts. He also would like to know why you need to calculate eligible and non-eligible portions. Prepare a memo explaining the provisions in the legislation for determining the eligible and non-eligible amount of a retiring allowance.

Answer 1

A retiring allowance may include aneligible portion and a non-eligible portion. A retiring allowance may be paid over one or more years. ... The amounts transferred cannot exceed the employee's eligibleportion of the retiring allowance minus theeligible portion you transferred in a prior year. The need to calculate eligible and non eligible retiring allowance is to know the amount that can be transferred.

Retiring allowances

Retiring allowances are reported on the T4 slip.

A retiring allowance (also called severance pay) is an amount paid to officers or employees when or after they retire from an office or employment, in recognition of long service or for the loss of office or employment.

A retiring allowance includes:

• 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 (wrongful dismissal when the employee does not return to work)

A retiring allowance does not include:

• Salary, wages, bonuses, overtime, and legal fees.
• A superannuation or pension benefit.
• An amount an individual receives as a result of an employee's death (these payments may be treated as death benefits).
• 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, to the extent these amounts are not taxable. For more information, see Income Tax Folio S2-F1-C2, Retiring Allowances.

If you pay a retiring allowance to a resident of Canada, deduct income tax from any part you pay directly to the recipient using the lump-sum withholding rates.

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.

Combine all retiring allowance payments that you have paid or expect to pay in the calendar year when determining the withholding rates for lump-sum payments.

If you pay a retiring allowance to a non-resident of Canada, withhold 25% of the retiring allowance (the withholding rates may vary depending on tax conventions and agreements). 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.

Do not deduct CPP contributions or EI premiums from retiring allowances.

Examples - Retiring allowance calculations

Example 1 – Calculation of an amount eligible for transfer

In November 2018, you pay Bruno, your ex-employee, a retiring allowance of $50,000. He worked for you from 1986 to 2018 (32 years, including part-years of service). He did not contribute to a pension plan or DPSP.

Calculate the amount of retiring allowance eligible for transfer as follows:

Step 1: $2,000 × 10 years (from 1986 to 1995, including part-years) = $20,000

Step 2: $1,500 × 3 years (from 1986 to 1988, including part-years) = $4,500

Step 3: Add the result of step 1 ($20,000) + the result of step 2 ($4,500). The total amount eligible for transfer is $24,500.

Note

You can no longer transfer $2,000per year of service to an RPP or RRSP for 1996 and later years.

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

The difference of the non-eligible amount of $25,500 ($50,000 – $24,500)between the allowance paid and the maximum eligible for transfer could be transferred directly to Bruno's RRSP without tax deductions if he gives you a written statement saying that the amount is within his RRSP deduction limit.

Example 2 – Calculation of an amount of remuneration on which you have to deduct tax at source

Colette is retiring. She is paid a retiring allowance of $35,000 in recognition of long service, of which $12,000 is eligiblefor transfer to her RRSP under paragraph 60(j.1) of the Income Tax Act. Colette wants you to transfer the total amount of the eligible retiring allowance ($12,000) 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.

You have to calculate the amount of remuneration that requires tax deductions at source as follows:

Step 1: Determine the amount of remuneration that does not require tax

Add the amount of retiring allowance that is eligible for transfer to the RRSP ($12,000) and the amount that can be transferred to an RRSP based on Colette's deduction limit ($11,000). The amount of retiring allowance that does not require tax deductions is $23,000.

Step 2: Determine the amount of the retired allowance that requires tax

Subtract the result of step 1 ($23,000) from the entire amount of retiring allowance ($35,000). The result ($12,000) is the amount of remuneration that requires tax deductions at source.

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.