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 payment 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 Income Tax Act (federal statute).

QPP contributions

A retiring allowance is not subject to Québec Pension Plan (QPP) contributions.

QPIP premiums

A retiring allowance, other than an indemnity in lieu of notice under the Act respecting labour standards, is not subject to Québec parental insurance plan (QPIP) premiums.

Other employer contributions

A retiring allowance is not subject to 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).

Indemnities in lieu of notice under the Act respecting labour standards and amounts paid as damages on termination of an employment contract are subject to the contribution related to labour standards.