In these difficult times, an increasing number of employees lose their jobs or are offered early retirement. In the negotiations for their departure, several employees are entitled to lump sum amounts in recognition of past service. For tax purposes, these amounts are normally considered to be retiring allowances.

A retiring allowance includes any reasonable amount received from an employer in recognition of long service for the loss of employment or for retirement. It is possible to have another job later on, but this job may not be with the same employer or an affiliated employer, unless the hiring was not anticipated at the time of departure. A retiring allowance includes a payment in respect of unused sick leave.

Payment

A retiring allowance can be paid in one lump sum or several instalments spread out over one or more years. To be deductible in a given taxation year, the retiring allowance must be paid within 180 days after the end of the taxation year. Otherwise, the expense can only be claimed by the employer in the year in which the payment is made (similar to the rule for year-end bonuses).

Transfer to an RRSP or RPP

An amount received as a retiring allowance may be transferred on a tax-free basis to a registered retirement savings plan (RRSP) or a registered pension plan (RPP). The deduction is limited to $2,000 per year (or part of a year) of employee service prior to 1996 plus $1,500 for each year prior to 1989 in respect of which no employer contributions to an RPP or DPSP have vested in the employee. No deductions at source will be withheld if the proper forms are filled out and if the funds are paid directly by the employer to the trustee of the RRSP or RPP. Beginning in 1997, transfers of retiring allowances to RRSPs were no longer subject to the alternative minimum tax ("AMT") in Quebec. Following the February 1998 federal budget, RRSP rollovers of retiring allowances were also no longer subject to federal AMT. This exemption from federal AMT is retroactive to 1994.

The above provides general information only. It should not be regarded or relied upon as accounting or taxation advice or opinions. Logan Katz LLP Chartered Accountants would be pleased to provide more information or specific advice on matters of interest to you.

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