Welcome to our Guide to Retiring allowance in Canada! It can be difficult to leave a job, and even worse, to lose your job. There are often some financial plans that you need to make when you are leaving your job voluntarily or involuntarily. Planning for retirement allowance comes first, followed by alternatives for pension plans, salary continuation, and employment benefits. In this article, we’ll talk about how to plan for your retirement allowance after you leave a job. Our blog will cover unique tax laws outlined in Canada that can lead to tax deductions, what a retiring allowance is, eligible retiring allowance, and the transfer of a retiring allowance.
What is a Retiring Allowance?
Starting our Guide to Retiring allowance in Canada, let’s first understand what a retiring allowance is. A retiring allowance is money given to officials or employees in recognition of their lengthy service or as compensation for losing their job. A retiring allowance may be given in one lump sum or over time. Retiring allowance is similar to severance or termination pay, but the thing is that retiring allowance has some eligibility rules surrounding it.
To put it another way, a retiring allowance can be what it sounds like—a payment made to an employee when they retire—or it might be what most people would refer to as a severance payout or package.
Any compensation paid for the termination of one of your employees—through no fault of their own (such as being laid off or company closure)—would often be regarded as a retirement allowance. A retirement allowance may result from or follow the termination of employment.
The following are typically included in retirement allowance payments:
- The payments made for unused sick time upon termination
- Any sums that people receive when their position or employment is terminated, even if it’s for damages (such as for wrongful dismissal)
The following are not included in retirement allowance payments:
- Salary, earnings, overtime pay, bonuses, and legal expenses.
- A pension or superannuation benefit
- A sum of money received by a person as a result of the passing of an employee (these payments may be treated as death benefits)
- A gain from certain counselling services
- Payments for unused vacation time accrued prior to retirement
- Pay in lieu of notice of termination
- Damages granted under human rights legislation for actual or claimed infringement of an employee’s applicable human rights
Keep in mind that according to the Income Tax Act (the “Act”), any money you receive as a retirement allowance from a current or former employer is subject to taxation as income in the year it is received. The CRA does, however, grant you a tax deduction if the money received as a retirement allowance is transferred to a Registered Retirement Savings Plan (RRSP) or Registered Pension Plan (RPP) for specific employment years.
Eligible Retiring Allowances and Non-eligible Retiring Allowances
Continuing on with our Guide to Retiring allowance in Canada. If you are someone who has a Registered Retirement Savings Plan (RRSP) or is interested in possibly opening one, there is something that you should be aware of when it comes to the process of transferring a retiring allowance over to a RRSP, or to a Registered Pension Plan (RPP). Typically there are yearly limits to RRSPs and RPPs but the amount of the retiring allowance that is considered to be an “eligible” retiring allowance can be moved to your RRSP on a tax-deferred basis without requiring unused RRSP contribution room according to special tax regulations in the Income Tax Act. The non-eligible retirement allowance component can only be put toward your RRSP if you have unused RRSP contribution room.
Eligible Retiring Allowance
Your employer uses the following calculation, which is based on years of employment, to determine the eligible portion.
The Eligible Retiring Allowance = the smaller of the two amounts:
- i) The actual amount you receive as a retirement allowance; or,
- ii) The sum of:
- a) $2,000 for each year or part of a year before 1996 where you worked for the employer, plus
- b) $1,500 for each year or part of a year before 1989 of that employment in which none of your contributions to your pension plan or DPSP were vested in your name when the retiring allowance is being paid (i.e. generally if you were not a member of a pension plan or DPSP for years before 1989 then you may be eligible for this additional $1,500 per year).
These are the eligible retiring allowance calculations, and though it might be tough for you to find this information, it is your employer’s responsibility to figure out these amounts and determine which one is correct for your case as their employer. You may receive an eligible retirement allowance in full or in part, directly, or it may be transferred to your RRSP. Your employer is not required to deduct taxes when the money is sent straight to your RRSP, but remember that if it is paid straight to you, any applicable withholding taxes will be deducted from the amount. If the eligible retiring allowance is paid to you directly, you can still take advantage of the unique rollover provisions as long as you contribute to your RRSP within 60 days after the end of the year you received it.
Ineligible Retiring Allowance
Despite the fact that the ineligible retirement allowance is not eligible due to the unique rollover rules, you can still contribute to your RRSP, whether it is a spousal RRSP or your own RRSP, to deduct the taxation of the payment if you have enough unused contribution room for an RRSP. Contributions must be made within 60 days of the end of the tax year, which is usually March 1st. In order to avoid taxation, your employer could need credible confirmation that you have adequate RRSP contribution room. For this purpose, a copy of your Notice of Assessment from the prior year, which displays your RRSP deduction cap, would be adequate. Even if you present this documentation, your employer may decide not to make a direct transfer to your RRSP.
When your personal income tax return is assessed, you will receive a refund of the withholding tax that your employer withheld if you make a contribution to an RRSP or a spousal RRSP. Alternatively, the amount will be used to reduce the tax you owe on other income on your tax return, resulting in less taxes owed on your assessment.
Retirement Allowance and Taxes
Making contributions from a qualifying retiring allowance to an RRSP or RPP will allow you to increase your plan contributions for a particular year beyond the regular annual limits. When receiving your retiring allowance, if your employer does not pay out this amount to your deferred pension or retirement plan, there can be withholding taxes due to it being directly sent to you, therefore, we highly recommend you instruct your employer to pay the retiring allowance to the correct account. Additionally, if your employer plans to deduct taxes from the payment, you might want to think about submitting Form T1213 – Request to Reduce Tax Deductions at Source for Year(s) to the Canada Revenue Agency (CRA) to request permission to do away with the withholding requirement. You can give your employer the approval after the CRA has given its approval to this application. Your employer will be able to pay you without deducting taxes thanks to this. If you have enough time before the payment is due, you should think about filing form T1213 because it can take a few weeks to get the permission from the CRA.
You might not be informed of the amount that qualifies as a retiring allowance when your employer first informs you of the amount of your retirement allowance. The amounts of the eligible and ineligible retiring allowances for reporting on your T4 slip, however, must be determined by your employer. The table below shows the tax rate that is applied when withholding tax is necessary; it is the same rate as is applied to withdrawals from Canadian RRSPs:
How to Deduct Taxes on Retiring Allowance
As stated earlier, the best way to deduct the taxes on a retiring allowance payout is to put it in a deferred retirement account such as an RRSP or a RPP. This way you can shelter the taxation of this payment you will receive. Keep in mind that the payment needs to be directly sent to the account or you need to deposit the taxed amount to an RRSP or RPP when received.
Can I Transfer a Retiring Allowance?
Yes, you can transfer a retiring allowance and this is actually what we highly recommend and what we specialize in! You can transfer the retiring allowance to a Registered Retirement Savings Plan or a Registered Pension Plan. These are your main options, even if you get the retiring allowance directly to you, you still have an opportunity to deduct the tax and the withholding tax if you put the allowance away in one of the two accounts within the RRSP deadlines.
Transfer of a Retiring Allowance
Transferring retiring allowance is the most important part of our Guide to Retiring allowance in Canada. When it comes to the transfer of a retiring allowance, there are some crucial things to keep in mind. A retiring allowance may be directly transferred in full or in part to a registered pension plan (RPP) or a registered retirement savings plan (RRSP) by employees who have worked for the company since before 1996. This section includes the eligible portion and the amount eligible for transfer. An eligible component and a non-eligible portion may both be included in a retirement allowance.
A retirement benefit may be paid over a period of one or more years. It is possible to transfer payments made in a given year to an RRSP or an RPP. Although the transfers must total more than the employee’s eligible portion of the retirement allowance, and less than the eligible portion you transferred in the previous year. For instance, if an employee earns $60,000 payable in six $10,000 installments and has an eligible amount of $40,000, they can decide how the eligible and non-eligible portions would be allocated to the annual installment payments.
A retirement allowance rollover under section 60(j.1) of the Act concerns the sum an employee gets for services provided before 1996. The maximum amount an employee may roll over tax-free is the sum indicated in the T4 code 66, Eligible Retiring Allowances, on their tax return. If the contributor is also the annuitant, then just the eligible share of a retirement allowance may be contributed to an RRSP. In this instance, the rollover can be completed regardless of how much RRSP space the retiree receiving the retiring allowance has available.
For instance, Daniel will receive a $5,000 retiring allowance that can be rolled over to his RRSP. $5,000 will be reported by his employer in code 66 on his T4 slip. Although Daniel only has $2,000 in RRSP contribution room available, he can roll over the entire $5,000 tax-free.
The non-eligible portion of the retiring allowance may also be transferred in whole or in part by your employee to their RRSP or the RRSP of their spouse or common-law partner.
How to Transfer My Retiring Allowance?
Our Guide to Retiring allowance in Canada wouldn’t be complete without guiding you in the right direction! So, if you are someone who is about to receive a retiring allowance or are getting a retiring allowance, it is important that you reach out to our team of financial advisors who can help you look into your options but also who can make the transferring process much smoother and easier for you. As you can tell from the information above that there are a lot of tax laws and rules surrounding the process of transferring the retiring allowance amount to your RRSP or to your RPP. Don’t risk making the wrong move and getting penalized, rather you can contact us and we will meet with your for free to discuss your situation and then we will help you with the process of transferring the retiring allowance. Feel free to contact us and we can get starting on reducing the taxes on your hard earned money!
Transferring Retiring Allowance to Registered Retirement Savings Plan
If you started working for your employer before 1996, any money you receive as a retiring allowance upon termination will allow you to increase your standard RRSP or RPP contribution limit, maximizing your tax deferral. Contining on with our Guide to Retiring allowance in Canada, let’s look into spousal RRSPs.
Can a Retiring Allowance be Transferred to a Spousal RRSP?
The qualified retirement allowance must be moved to the recipient’s RRSP in order to be eligible for the special rules that permit the transfer without utilizing unused RRSP contribution room (i.e. an RRSP where that individual is the annuitant). Under the unique regulations, eligible retirement allowances cannot be transferred to a spousal RRSP, but non-eligible portions can be sent to a spouse’s or common-law partner’s RRSP. It is your responsibility to keep in mind your RRSP contribution limits and to be wary of any tax issues that can occur. Check out our blog on RRSPs to find out everything you need to know about RRSPs!
Conclusion: Transferring Retiring Allowance in Canada
Before we conclude our Guide to Retiring allowance in Canada, it is a great time to keep in mind these important points:
Once you’ve been fired or retired, you might only be eligible for an eligible retiring allowance. The retiring allowance could be in jeopardy if you leave your job but quickly are hired again by the same business.
Whether or not you contribute to an RRSP, the retirement allowance you get may cause a delay in you receiving Employment Insurance (EI) benefits, if you are eligible for it.
If you become 72 or older in the year that you get your eligible retirement allowance, you are not eligible to have an RRSP and are therefore not allowed to contribute to one.
It’s crucial to remember that money you receive as a retirement allowance—either eligible or ineligible—will be useful in determining the RRSP contribution limit for the following year.
Any percentage of the qualified retirement allowance that is paid into your RRSP cannot be designated as a Home Buyers’ Plan or Lifelong Learning Plan repayment.
Need help transferring your retiring allowance?
Hope you liked our Guide to Retiring allowance in Canada! At Protect Your Wealth we can help you create a strong financial plan that can benefit your investments and can create a retirement plan that fits your needs and your situation. Get in contact with us today to find out more about retiring allowance transfers and we can help you with these difficult and time consuming processes!
At Protect Your Wealth, we’ve been providing expert advice for all types of life insurance, and retirement and investing planning, since 2007. As your Life Insurance broker and financial planner, we work with you to create a personalized plan for your family or business that covers and meets your needs.
Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today. We’re proudly based out of Hamilton, and service clients anywhere in Ontario, B.C. and Alberta including areas such as Guelph, Kitchener, Barrie, Airdrie, and Kelowna.
Frequently Asked Questions (FAQs) about Retiring Allowance in Canada
- Income that is made in the RRSP through investments such as ETFs, mutual funds, stocks, bonds, and GICs are tax-deferred as long as the income remains in the RRSP account.
- The tax-advantaged portion of the RRSP is where the savings occur, year to year prior to your retirement. Any contribution made to your RRSP is tax-deductible, meaning that the contributions you make can reduce the amount of taxes you pay on the current year tax return.
- Your RRSP contribution room can be moved over to future years, or if it is unused. This is especially helpful to reduce taxes during your tax return.
- The RRSP account can be used by couples to reduce their individual taxes as well. For example, if you make more income than your spouse, you can contribute to their RRSP which will reduce the amount of taxes that you pay.
- You can withdraw money from your RRSP account without getting taxed immediately if the amount withdrawn is used towards purchasing your first home under the Home Buyers Plan.
- You can withdraw money from your RRSP account without getting taxed if the amount withdrawn is used towards your education under the Lifelong Learning Plan.
The Tax-Free Savings Account (TFSA) can hold various investment benefits, such as cash, stocks, bonds, GICs and mutual funds, the growth of which will not be tax-deductible. Any contribution or any income earned in the account is generally tax-free, even when it is withdrawn.
A Locked-In Retirement Account (LIRA) is an account meant for those who have an employee pension plan and leave their job. You have the option of transferring your pension plan savings into a LIRA, but you will not have access to the funds until you retire, hence it is locked-in.
A Registered Retirement Savings Plan (RRSP) is a tax-advantaged retirement savings plan. You contribute to the RRSP throughout your life and once you retire you convert it to a Registered Retirement Income Fund to withdraw your income. The RRSP has plenty of tax-deductible benefits and tax-advantages.
Most people access their RRSP when they retire or are nearing retirement, but truthfully you can access your RRSP whenever you want. There will be a tax penalty if a lump-sum withdrawal occurs, rather than letting the account mature when you’re 71 years old, or if you don’t convert it to an RRIF, or annuity when you retire.
The contribution limit in 2022 is $29,210 and the contribution limit in 2021 was $27,830. Alternatively, the maximum amount you can contribute is 18% of your income or the maximum contribution amount, whatever is least.
The contribution limit in 2023 is $30,780. Alternatively, the maximum amount you can contribute is 18% of your income or the maximum contribution amount, whatever is least.
Yes, your RRSP contributions are tax-deductible meaning that you can deduct your contribution amount when you file your taxes.
The Eligible Retiring Allowance = the smaller of the two amounts:
- i) The actual amount you receive as a retirement allowance; or,
- ii) The sum of:
- a) $2,000 for each year or part of a year before 1996 where you worked for the employer, plus b) $1,500 for each year or part of a year before 1989 of that employment in which none of your contributions to your pension plan or DPSP were vested in your name when the retiring allowance is being paid (i.e. generally if you were not a member of a pension plan or DPSP for years before 1989 then you may be eligible for this additional $1,500 per year).
These are the eligible retiring allowance calculations, and though it might be tough for you to find this information, it is your employer’s responsibility to figure out these amounts and determine which one is correct for your case as their employer.
There are several ineligible retiring allowances such as unpaid vacation time, paid sick days and more but these don’t count as eligible retiring allowances. When you do get ineligible retiring allowances, you can still transfer them to a RRSP. You can still make contributions to your RRSP, whether it is a spousal RRSP or your own RRSP, to reduce the taxation of the payment even when the ineligible retirement allowance is not eligible because of the special rollover requirements, assuming you have enough unused contribution room for an RRSP. The deadline for contributions, which is often March 1st, is 60 days after the end of the tax year. Your employer can want reliable proof that you have enough RRSP contribution room in order to avoid taxation. A copy of your Notice of Assessment from the previous year, which shows your RRSP deduction cap, would be sufficient for this purpose.
Yes, a retiring allowance in many cases can be transferred directly to your RRSP and will not be taxed and might not be affected by the contribution room of your RRSP either. The best way to find out what is the right option for you and to transfer your retiring allowance, contact our financial advisors to help you through the process.
Yes, a retiring allowance in many cases can be transferred directly to your RPP and will not be taxed
Here at Protect Your Wealth we have experience and expertise in helping people set up their retirement planning options and this includes RRSPs, LIRAs and TFSAs and we have helped facilitate the transferring of retirement allowances. Please contact us if you are interested in transferring your retiring allowance over to a RRSP.