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.
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:
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.
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.
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