53 Describe retiring allowances and how they are treated for tax purposes.

What is Retiring Allowance? 

a retiring allowance is an amount received by an employee after they retire from their  employment/work.

A retiring allowance includes:

• Payment for unused sick- leave credits on termination
• The amount that an individual receives when their office or employment is terminated.

Tax implications to the recipient

Under subparagraph 56(1)(a)(ii), a retiring allowance is included in computing the income of an individual in the year it is received. If an employee chooses to receive the retiring allowance in installments, they will be taxable in the year received.

An individual might terminate employment but die before receiving all or a part of a retiring allowance to which they were entitled. In this case, any remaining amount received by their dependent, relation or legal representative will normally be included in the recipient’s income as a retiring allowance under subparagraph 56(1)(a)(ii).

Treatment for tax purposes: Retiring allowances are treated as other sources of income in the year received under 3(a).

Transfer to RRSP

Employees who have years of service before 1996 can directly transfer the retiring allowance to a registered pension plan (RPP) or a registered retirement savings plan (RRSP). This portion is known as an eligible amount of transfer. It is also possible to have a non-eligible portion which is an amount exceeding the employee’s eligible portion of the retiring allowance minus the eligible portion transferred in a prior year.

The eligible amount for the transfer under 60(j.1) of the Income-tax Act is limited to $2,000 for each year or part of a year before 1996 and $1,500 for each year or part of a year before 1989. One cannot transfer $2,000 per year of service to an RPP or RRSP for 1996 and later years.

Example: On June 2018, Ramneek retired and got $50,000 as her retiring allowance for the service period from 1986 to 2018 (32 years, including part years services). He did not make any contributions to a pension plan.

Ramneek’s eligible retiring allowance will be $20,000 ($2,000 × 10 years (from 1986 to 1995, including part-years)) plus $4,500 ($1,500 × 3 years (from 1986 to 1988, including part-years)) = $24,500.

Interactive content (Author: Prabhjot Brar, January 2020)

Interactive content (Author: Vincent Cajes, January 2020)

References and Resources:

• Article – “Income Tax Folio S2-F1-C2, Retiring Allowances” (Author: Government of Canada)

July 2019