A retiring allowance (also called "severance pay") is an amount paid to an employee in the following situations:

• The employee loses their job.
• The employee retires (in this case, the amount must be paid on or after the employee's retirement, in recognition of the employee's long service). 

A retiring allowance can be an amount refunded for sick leave accumulated but not used before the employee's resignation or retirement, an amount paid for damages plus interest, or an indemnity in lieu of notice.

A retiring allowance does not constitute a salary or wages but instead is considered another income.

Source deductions of income tax

You must withhold income tax from a retiring allowance at the rates applicable to single payments:

• 14% if the payment is $5,000 or less
• 19% if the payment is more than $5,000

Transfer of payments

A retiring allowance can be transferred in whole or in part to a registered pension plan (RPP) or a registered retirement savings plan (RRSP), either:

• by you at the time of payment
• by the current or former employee during the taxation year or during the 60-day period following the end of the taxation year

You are not required to withhold income tax from the portion of the retiring allowance that is transferred directly to an RPP or an RRSP and that can be deducted from the employee's income. The deductible amount is the amount determined under the federal Income Tax Act.

Québec Pension Plan contributions

You do not withhold or pay Québec Pension Plan (QPP) contributions on a retiring allowance.

Québec parental insurance plan premiums

You do not withhold or pay Québec parental insurance plan (QPIP) premiums on a retiring allowance, unless the allowance is an indemnity in lieu of notice under the Act respecting labour standards.

Other employer contributions

You do not pay the contribution to the health services fund, the contribution related to labour standards or the contribution to the Workforce Skills Development and Recognition Fund (WSDRF) on a retiring allowance.

You have to pay the contribution related to labour standards on indemnities in lieu of notice under the Act respecting labour standards and amounts paid as damages on termination of an employment contract.