A retiring allowance (also called "severance pay") is an amount paid to an employee on:
- loss of employment; or
- retirement (in this case, the amount must be paid on or after retirement of the employee, 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.
To calculate a source deduction of income tax on a retiring allowance payment, you must use the following rates:
- 15% (if the payment does not exceed $5,000); or
- 20% (if the payment is over $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; or
- by the employee 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 or former employee's income. The deductible amount is the amount determined under the Income Tax Act (federal statute).