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Retiring Allowance in Canada: Tax, Rates and RRSP Transfers
By Parvesh Benning, Licensed Life Insurance Broker
Some severance payments are treated as a retiring allowance, and how they are moved can decide whether withholding tax comes off now or the funds keep growing tax-deferred.
A retiring allowance is the money you get when you leave a job, whether through retirement, a layoff, or termination, and the rules around it decide how much tax comes off the top. This guide covers what counts as one, how it is taxed, and how to move the eligible part into an RRSP or RPP without losing it to withholding tax.
Updated: June 26, 2026
Retiring Allowance in Canada: Tax, Rates and RRSP Transfers
By Parvesh Benning, Licensed Life Insurance Broker, Updated: June 26, 2026
Some severance payments are treated as a retiring allowance, and how they are moved can decide whether withholding tax comes off now or the funds keep growing tax-deferred.
A retiring allowance is the money you get when you leave a job, whether through retirement, a layoff, or termination, and the rules around it decide how much tax comes off the top. This guide covers what counts as one, how it is taxed, and how to move the eligible part into an RRSP or RPP without losing it to withholding tax.
Here is the part that catches people off guard: a retiring allowance is taxable income, and if your employer pays it straight to you, they may withhold 10% to 30% from the cash portion before you receive it. The good news is that a large part of it can often move straight into an RRSP or RPP tax-deferred, and for longer-serving employees that part does not even use up your contribution room.
How much you can shelter comes down to your years of service and when you worked them. Use the calculator below to estimate your eligible rollover and what the tax would be if you took the cash instead.
Retiring Allowance & RRSP Rollover Calculator
See how much of your severance or retiring allowance can be rolled into an RRSP or RPP tax-deferred, how much is taxable now, and the upfront withholding tax you can avoid.
This calculator estimates the rollover rules only. Your employer’s reporting, your province, and your personal tax return determine the final result.
What this guide covers:
What counts as a retiring allowance in Canada
A retiring allowance is money paid to you when you leave a job, in recognition of long service or as compensation for losing the job, and the CRA treats it as taxable income in the year you receive it. The name is misleading. You do not have to be retiring. Someone laid off at 38 after twelve years can get a retiring allowance just as easily as someone walking out the door at 65.
Most people meet it under a different name: severance. A severance package, termination pay, or a wrongful dismissal settlement is generally a retiring allowance in the CRA’s eyes. What it is called in your paperwork matters less than how it gets reported.
It is not mandatory. There is no rule that says an employer must pay one. Whether you get a retiring allowance, and how big it is, comes out of employment standards, your contract, or a settlement, not the tax rules. The tax rules only decide what happens to the money once it is on the table.
Counts as a retiring allowance
- Severance amounts paid as compensation for loss of employment
- Pay for unused sick days at termination
- Damages for wrongful dismissal
Does not count
- Salary, overtime, and bonuses
- Pension or superannuation benefits
- Pay in lieu of notice and unused vacation pay
That last column matters more than it looks. Unused vacation pay and pay in lieu of notice are common in a severance package, but they are regular employment income, not a retiring allowance. They do not get the RRSP rollover treatment covered below. If your settlement lumps everything together with no breakdown, the CRA generally treats the whole thing as a retiring allowance, so getting the agreement to spell out each piece is worth doing before you sign.
One piece of good news that surprises people: a retiring allowance is not subject to CPP or EI deductions. Only income tax applies. That makes the math different from a regular bonus of the same size, and it is part of why the RRSP rollover option below is worth understanding before the money is paid out.
Eligible vs non-eligible retiring allowance (and Box 66 vs Box 67 on your T4)
The eligible part is the amount you can move straight into your own RRSP or RPP tax-deferred without using any contribution room, and it is based entirely on years you worked before 1996. Everything else is the non-eligible part. Your employer splits the two and reports them separately on your T4. The CRA also refers to SPPs and PRPPs where applicable, but for most readers the practical decision is usually RRSP versus RPP.
Here is the rule the eligible amount runs on. It is not a percentage and it has nothing to do with how big your severance is. It is years of service, and only old ones count.
So a year before 1989 with no locked-in pension is worth $3,500 of rollover room. A year from 1989 to 1995 is worth $2,000. Anything you worked in 1996 or later adds nothing to the eligible amount. If you started your job in 1996 or after, your eligible amount is zero, and that is not a mistake, it is just how the rule was written when it was phased out.
The non-eligible part is the rest. You can still shelter it in an RRSP, your own or a spousal one, but only if you have unused contribution room to cover it. The calculator at the top of this page does both halves of this math for you once you put in your years.
When your T4 shows up, this split is sitting in two boxes:
T4 Box 66
Eligible retiring allowance
The part that can roll into your RRSP or RPP with no contribution room needed.
T4 Box 67
Non-eligible retiring allowance
Sheltering this needs available RRSP room, the same as a normal contribution.
Working out which box your numbers fall into is your employer’s job, not yours, and it can be tough to confirm on your own. If the split on your T4 does not match what you expected, that is worth raising before you file, because it changes how much you can roll over without touching your RRSP room.
How a retiring allowance is taxed
If your employer pays a retiring allowance straight to you, they hold back income tax at a flat withholding rate, and the rate climbs with the size of the cash payment. This is separate from the rollover option. It only bites on the part that lands in your bank account instead of going into an RRSP or RPP.
Outside Quebec, the withholding works in three bands, set by the size of the cash lump sum:
10%
on amounts up to and including $5,000
20%
on amounts over $5,000 up to $15,000
30%
on amounts over $15,000
One thing to be clear on, because it trips people up: the rate is picked by the size of the cash payout and then applied to the whole cash amount. It is not stacked in slices the way your regular income tax brackets are. Quebec runs on different federal and provincial rates, so if you are filing there, treat these three bands as outside-Quebec only and check your own numbers.
Withholding is not your final tax. It is an estimate your employer is required to take off. Your actual tax on the allowance is your marginal rate when you file, so depending on your total income for the year you might owe a bit more or get some of it back. The withholding just decides how much leaves now.
This is exactly why the transfer option matters. Money moved directly into an RRSP or RPP has nothing withheld, because the CRA is not taxing income you have deferred. Take the same money as cash and you lose the withholding up front and wait until you file to sort it out. The next section walks through how to set that direct transfer up so you keep more of it working for you.
How to transfer it to an RRSP or RPP tax-deferred
The cleanest way to keep the tax off your retiring allowance is to have your employer pay the eligible part directly into your RRSP or RPP, not to you. Direct transfer means nothing is withheld. Money that touches your bank account first gets the withholding tax taken off, and then you are chasing it back at filing time.
The eligible part is the easy one. It rolls in under the special rule, no contribution room required, as long as it goes to your own plan. The order of operations is what people get wrong, so here it is start to finish.
Get the split in writing. Ask your employer or their payroll team what they will report as eligible (Box 66) and non-eligible (Box 67). That number drives everything else.
Direct the eligible part to your RRSP or RPP. Instruct the employer, in writing, to transfer it straight into your plan. No withholding comes off, and it does not use your contribution room.
Decide what to do with the non-eligible part. If you have unused RRSP room, you can direct that part in too. Show the employer proof, usually your latest Notice of Assessment, and they can transfer it without withholding up to your room.
If any of it was paid to you first, you can still contribute it to an RRSP and claim the deduction when you file, which may reduce tax owing or create a refund depending on your full return, as long as you do it within the RRSP deadline, normally 60 days after year-end.
A point worth slowing down on. You do not always need a letter of authority from the CRA to skip the withholding on the eligible part. If you give your employer a signed statement that the amount is within your RRSP deduction limit, they can transfer it without holding tax back. Even with that, an employer can still decline to do a direct transfer, which is the kind of thing that is easier to sort out before the cheque is cut than after.
The allowance does not have to arrive in one go either. It can be paid over more than one year, and you can transfer each year’s payment as it comes. That flexibility is useful if spreading the income keeps you in a lower bracket, but it also means the eligible room gets used across those years, not reset each time.
Where the money sits once it is in. The rollover gets the funds into the RRSP or RPP tax-deferred. What you hold them in is a separate decision. One option many people do not realize they have is holding those funds in segregated funds inside the RRSP, which keeps the tax-deferred status while adding features a plain deposit does not have. Whether that fits depends on your situation. For a fuller picture of using insurance-based products this way, see our guide to the insured retirement plan and our overview of segregated funds in Canada.
There is a lot of paperwork and timing here, and the cost of getting the transfer instruction wrong is real money lost to withholding you did not need to pay. If you are about to receive a retiring allowance and want a second set of eyes before you sign anything, get in touch and we can walk through the transfer options with you. We will not give you tax advice, but we can help you understand how the rolled-over funds can be held and point you to confirm the tax details with a qualified tax professional.
Can a retiring allowance go into a spousal RRSP?
Only the non-eligible part can go into a spousal RRSP. The eligible part has to land in your own plan, the one where you are the annuitant, because that is a condition of the special rule that lets it roll over without using contribution room.
So the two halves split in different directions:
Eligible part
Your own RRSP or RPP only. No contribution room needed, but no spousal option.
Non-eligible part
Your own RRSP or a spousal RRSP, as long as there is unused contribution room to cover it.
The spousal route is worth a look if your partner expects a lower retirement income than you, since the money is taxed in their hands when it eventually comes out. That is the income-splitting idea behind it. It only works on the non-eligible part though, and it still draws on contribution room, so it is not free space the way the eligible rollover is. If you are weighing your own plan against a spousal one, our complete RRSP guide walks through how spousal plans and the attribution rules work.
What to watch before you decide
Before you lock in how you handle a retiring allowance, a few details change the math in ways that are easy to miss. None of these are dealbreakers, they are just the things people wish they had known first.
It can delay your EI. A retiring allowance may push back when your Employment Insurance benefits start, whether or not you put it in an RRSP. If you are counting on EI, factor the timing in.
Getting rehired can put the allowance at risk. If you leave and the same employer brings you back quickly, the eligibility of the allowance can come into question. The rules assume you have actually left.
Age 71 is a hard wall for your own RRSP. If you turn 72 or older in the year you receive the eligible allowance, you can no longer hold an RRSP, so that rollover route into your own plan is closed.
An eligible rollover does not use or create regular RRSP room. If the eligible part goes into your own RRSP, PRPP, or SPP, the CRA says it does not affect your RRSP deduction limit. A direct transfer to an RPP can create a pension adjustment that affects future room, so confirm that with your plan administrator before transferring to a pension plan.
You cannot use it for the Home Buyers’ Plan or Lifelong Learning Plan repayment. Any eligible allowance you roll into your RRSP cannot double as a repayment under either program.
If you are also sorting out where your other retirement savings sit, it can help to map the whole picture at once rather than one account at a time. Our guide on how much you need to retire in Canada is a reasonable place to start, and you can always confirm the tax specifics of your own situation with a qualified tax professional.
Frequently asked questions
Q1
What is an eligible retiring allowance?
It is the part of a retiring allowance you can move into your own RRSP or RPP tax-deferred without using contribution room. It equals $2,000 for each year or part-year you worked before 1996, plus $1,500 for each year before 1989 with no vested pension or DPSP, capped at the actual amount you received. Your employer calculates it and reports it in Box 66 of your T4.
Q2
What is a non-eligible retiring allowance and what can I do with it?
It is the part that does not qualify for the special rollover, often things like the portion tied to service in 1996 or later. You can still shelter it in your own or a spousal RRSP, but only if you have unused contribution room to cover it. It shows up in Box 67 of your T4.
Q3
How much tax is withheld on a retiring allowance?
On the part paid to you as cash outside Quebec, the withholding is 10% up to $5,000, 20% over $5,000 up to $15,000, and 30% over $15,000. The rate is set by the size of the cash payment and applied to the whole amount. It is an estimate, not your final tax, which is settled at your marginal rate when you file. Money transferred directly to an RRSP or RPP has nothing withheld.
Q4
Can I transfer my retiring allowance to my RRSP?
Yes. The eligible part can go directly into your own RRSP or RPP without using contribution room, and nothing is withheld if your employer transfers it directly. The non-eligible part can go in too, but only against available room. The cleanest approach is to instruct your employer in writing to transfer it before it is ever paid to you.
Q5
Is severance pay the same as a retiring allowance?
For tax purposes, usually yes. The CRA generally treats severance, termination pay, and wrongful dismissal settlements as a retiring allowance. Pay in lieu of notice and unused vacation pay are different, they are regular employment income and do not get the rollover treatment, so a settlement that breaks out each piece is clearer at tax time.
Q6
What is the RRSP contribution limit if I need room for the non-eligible part?
The RRSP dollar limit is $33,810 for 2026, $32,490 for 2025, and $31,560 for 2024, or 18% of your prior-year earned income, whichever is lower, plus any unused room carried forward. Your personal limit is on your latest CRA Notice of Assessment. Only the non-eligible part of a retiring allowance uses this room; the eligible part does not.
Rolling severance into an RRSP?
The transfer instruction is where tax deferral and withholding are often won or lost, and the rolled-over funds can be held in segregated funds inside your RRSP. We can walk through the options with you before you sign anything.
Call 1-877-654-6119 or book a 30-minute call at calendly.com/protectyourwealth/30min. We serve clients across Ontario, Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, and Saskatchewan with life insurance and segregated fund solutions.
This guide is general information, not tax or legal advice. Retiring allowance rules, withholding rates, and contribution limits are set by the Canada Revenue Agency and can change. Whether an amount is eligible, and how it is reported, is determined by your employer and your own circumstances. Confirm your situation with a qualified tax professional or accountant, and review the current rules directly with the CRA: Payments of retiring allowances (canada.ca).
