If you have lost your job or are retiring and will be receiving a severance payment, you may be able to shelter some of your severance from income tax.
To be able to do this, the payment must qualify as a retiring allowance and depending on your circumstances, some may be direct transferred to an RRSP.
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What Is A Retiring Allowance?
Retiring allowances are considered taxable income and is defined as an amount received on or after retirement to recognize long service or payments.
It is important to distinguish between regular employment income such as salary, bonuses, commissions, accumulated overtime, pay in lie of notice, and vacation pay as these do not qualify as the retiring allowance.
On the other hand, severance, as required under statute, accumulated sick leave, and damages awarded under judgment will qualify. If the allowance is not regular income (salary, pay in lieu etc.) and employment has actually ended, then a portion of the amount may be rolled into an RRSP without affecting your contribution limit. That is to say if you have maxed out your contribution room you may still be able to roll over a portion of your severance to your RRSP or RPP.
What Can Be Transferred To An RRSP?
There are two parts of the retiring allowance that may be transferred to an RRSP.
The first amount is termed an eligible amount. The maximum amount of the eligible amount that can be transferred is $2,000 for each complete or partial year of service prior to 1996 and $1,500 for each year before 1989 where employer contributions to a pension plan or DPSP had not vested. If you began employment in 1992, you would be able to transfer $8,000 directly to your RRSP (not your spouses).
The second part would be referred to as an ineligible amount which is the remaining amount of the retiring allowance that does not qualify above. The remaining could be transferred to an RRSP provided you have contribution room available.
How To Report Your Retiring Allowance
If you received a retiring allowance, the eligible portion, ineligible portion and the income tax withheld will be reported on a T4 or T4A. Report these amounts on your income tax return as follows:
Eligible Portion
The eligible portion is shown on your T4 in Box 66 (or Box 26 if the T4A was from 2009 and prior).
Report the eligible portion on Line 130 and Line 208. Also report the same amount on Line 240 and Line 245 of Schedule 7.
Line 130 includes the allowance in your income and Line 208 is the deduction. The rollover that does not impact your RRSP limit is reported on Line 240 of Schedule 7.
Ineligible Portion
The ineligible portions of your retiring allowance is shown in Box 67 of your T4 (or Box 27 if the T4A was from 2009 and prior). The income tax deducted (if any) will be included in Box 22.
Note: If you received a T3, the ineligible portion will appear in Box 26.
The ineligible portion is reported on Line 130 of your tax return and the income tax deducted on Line 437.
If you made an RRSP contribution for the ineligible amount or a direct transfer was made of the ineligible portion, report the contribution (transfer) on Schedule 7 on Line 2 or Line 3 depending on when the contribution was made.
It’s that simple.
Looking For Professional Help?
If you’re looking for advice or tax planning services, you can contact me directly through my professional tax practice.
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I lost my job in Aug 2010 (outsourced to India after 23 years) I took 43,513.49 of my package and requested this to be applied to a RRSP (I had lots of room)so I would not get hit hard with taxes for 2010. It has been brought to my attention today that I am only getting a receipt for Non Eligible portion… What happens to the eligible portion, I’m soooo confused! If this is the case then I will owe money to the government which was what I was trying to Aviod!!!
21,000.00 is eligible portion
22,513.49 is non-eligible portion
The eligible portion goes to your RRSP and does not affect your RRSP contribution room. The non-eligible portion is a regular RRSP contribution.
If all of your retiring allowance went to your RRSP, you should owe no tax.
Report $43,513.49 on Line 104 of your T1.
On schedule 7, report $43,513.49 on line 2. Report $21,000 on line 11, and $22,513.49 on line 10.
Complete the rest of schedule 7 and transfer the amount on line 13 to line 208 of your tax return.
If you do everything right, you will have no tax to pay.
Hi,
I am so confused about Canadian tax system..
I became Canadian permanent resident in May 2010. Before this I worked in my coutry of origin and after I stopped I received severance package about $16K and paid taxes there $2K.
The problem is that I claimed (you can claim it or leave for pension) it before I came to Canada but actually received after I became Canadian permanent resident.
Do I need to declare it as income from foreign country? Transferring to Canadian RRSP wasn’t an option in this case so I just made a bank transfer.
My 2010′s yearly income in Canada was about $40K.
There is a tax treaty between our countries.
Thank you very much.
hi,
tax for all your help in answering my questions.
For the non elegible portion transfer (based on the employees contribution limit for the year) is it taxed or not taxed if transferred directly to the employee’s RRSP? thanks.
Hi there,
It is included in your taxable income but there is no tax withheld at source. You need to make sure you claim the ineligble amount as a contribution on Schedule 7.
I received a retiring allowance in the beginning of January 2011 of $50,000.00. Of the 50k, I had available room for $29,500.00 for the eligible amount, $15,500 was the portion I put into my RRSP to cover my current and carry forward room, and $5,000 I took in cash. I got an RRSP receipt for the $29,500 for the eligible amount and $15,500 for the other portion, but I will not receive the T4 until next year when I am doing my taxes for 2011. Should I hold the receipt for the eligible amount until next year when i get the corresponding T4 explaining the payout? Both the $29,500 receipt and the $15,500 receipt show deposits to the RRSP for the first 60 days of 2011.
The allowances are included in your taxable income for 2011. You should carry these forward to 2011 and not claim them for 2010. The transfer ($29,500) and the other amount should be reported in Part C of Schedule 7 next year.
I have two other questions.
Do I have to show it as a carry forward on the schedule 7 for the taxes in
2010?
Can I claim the $15,500 for this tax year? That is the non eligible part .
From reading the posts, it looks like I can claim an eligible retiring allowance received in January 2011 to reduce my 2010 income. This seems great! But will doing so eat up my regular unused contribution room, since the related T4 income will not be until 2011? I would like to claim the eligible transfer amount against 2010 income, as my income will be higher than in 2011, but I don’t want to permanently lose out on the bonus RRSP room amount that the eligible retiring allowance effectively gives you. I expect to go back to work and eventually use up all my unused room with regular contributions and don’t want the eligible retiring allowance counted against my regular room.
Mohan,
An eligible allowance does not use contribution room. But be careful because all of the retiring allowance will be added to your 2011 income and taxed.
Here’s my situation: I rec’d a severance amount of $18,658.56 in Sept. 2010 (job went overseas). This amount appeared in Box 67 on my T4. I contributed the entire amount to RRSP then took out $5333.32 (paid $533.32 tax) in Nov. 2010. When I entered these amounts as instructed,the program added my income (37,263.12)+ full RRSP contribution (18,658.56) + the amount I took out of my RRSP ($5,333.32) = over $61,000 income. Because I took out $5333.32 against the $18,658/56 my income should be $55921.68. Should this program know to subtract that amount? It didn’t so now it has caused me to pay in over $500. Shouldn’t I be getting a refund instead? Does anyone know how to get around this?
The allowance and withdrawals are separate transactions.
The full allowance is added to your income on Line 130 and you deduct the same amount as an RRSP contribution. This means you include $18,658 on Lines 130 and again on 207. These entries eliminate each other.
The withdrawal of $5,333 is also added to your income on line 130.
The income on line 130 should show as $23,991.88.
I’ve received a severance package and want to use a portion of it to fully max out my 2011 RRSP contribution limit and reduce the amount of taxes withheld from the severance. What’s the best way to deal with any additional contributions assuming I find new employment where there is either a Group RRSP plan with employer contribution or a defined benefit pension plan – will those contributions be considered over-contributions?
Your 2011 RRSP contribution room is based on 2010 earned income. If you max out your 2011 with your severance you will not have any room available if you are able to participate in a GRRSP or DPSP. You might want to contribute a smaller amount now and make a catch-up contribution before the end of February 2012. You’ll pay withholding tax but you’ll have maximum flexibility.
My wife transferred an eligible amount (retiring allowance) of $21000 and filled out the necessary forms and schedule 7 according to the instructions on the CRA website. The following year’s notice of assessment (2010) shows an RRSP over contribution of $21000. As far as I can tell, she filled in the the forms correctly.
Any ideas why an over contribution is noted on the assessment?
You should call the CRA to clear this up.
Back in August of last year I was packaged out of the company as part of the restructuring with a lump sum payment of the severance pay.
In order to avoid any potential issues with income taxes, I say my accountant back in Feb to review copy of my T4 and make sure that if needed I still have time to make RRSP contributions. I was told that everything was in order.
To my surprise, I just found out that when reviewing my T4, person that reviewed my T4 missed the amount in box 67 which was suppose to be added to the amount in box 14 for calculate my total income.
Now I have to pay substantial amount of money back in income taxes.
Are you aware of any options / exception process that I can apply for that would allow me to lower my tax for 2010 or perhaps deposit more money into the RRSP plan?
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