Transfer of a retiring allowance

Employees with years of service before 1996 may be able to directly transfer all or part of a retiring allowance to an specified pension plan (SPP), an RPP, an RRSP or a pooled registered pension plan (PRPP). This part is commonly referred to as the eligible portion or the amount eligible for transfer. A retiring allowance also referred to as a severance pay may include an eligible portion and a non‑eligible portion.

If you paid a retiring allowance to an Indian employee related to their tax-exempt income, go to Code 69 – Indian (tax-exempt income) – Non-eligible retiring allowances.

A retiring allowance may be paid over one or more years. The amounts paid in any particular year may be transferred to an RRSP or an RPP. The amounts transferred cannot exceed the employee’s eligible portion of the retiring allowance minus the eligible portion you transferred in a prior year.

For example, if an employee receives $60,000 payable in instalments of $10,000 over 6 years and has an eligible amount of $40,000, the employee can choose how they want the eligible and non-eligible portions applied to the instalment payments in each year.

The amount that is eligible for transfer under paragraph 60(j.1) of the Income Tax Act (the Act) is limited to:

• $2,000 for each year or part of a year before 1996 that the employee or former employee worked for you (or a person related to you)
  plus
• $1,500 for each year or part of a year before 1989 of that employment in which none of your contributions to a pension plan or deferred profit sharing plan (DPSP) were vested in the employee’s name when you paid the retiring allowance. To determine the equivalent number of years of vesting, refer to the terms of the particular plan. The number can be a fraction.

A rollover of a retiring allowance under paragraph 60(j.1) of the Act involves amounts an employee receives for services rendered before 1996. The amount the employee can rollover, tax free, cannot be more than the amount shown on their T4 slip in code 66 – Eligible retiring allowances. Only the eligible portion of a retiring allowance can be contributed to an RRSP if the contributor is also the annuitant. In this case, the rollover is completed regardless of the RRSP room available to the person receiving the retiring allowance.

For example, Samuel will receive a retiring allowance of $5,000 that is eligible for rollover to his RRSP. His employer will report $5,000 on his T4 slip in code 66. Although Samuel's available RRSP contribution room is $2,000, he can rollover the full $5,000 into his RRSP tax free.

Your employee may also ask you to transfer some or all of the non-eligible portion of the retiring allowance to their RRSP, or to a spousal or common-law partner’s RRSP. The part that you transfer cannot be more than the employee’s available RRSP deduction limit for the year.

You do not have to deduct income tax on the amount of the eligible retiring allowance that is transferred directly to an employee’s RRSP or to an RPP on behalf of the employee. You also do not have to deduct income tax on any part of the retiring allowance that your employee transfers to a spousal or common-law partner’s RRSP if you have reasonable grounds to believe your employee can deduct the RRSP contribution when filing their income tax and benefit return. For more information, see RRSP contributions you withhold from remuneration.

The part of the retiring allowance paid in each year that is eligible for transfer should be reported on a T4 slip in the "Other information" area, using code 66. Amounts not eligible for transfer are reported in the "Other information" area using code 67 (or code 69 for an Indian).

To help you calculate the amount of retiring allowance eligible for transfer and to give you an example of how to calculate an amount of remuneration on which you withhold income tax deductions, see examples below.