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Retiring Allowance
Practical Law Canada Glossary 4-617-2516 (Approx. 3 pages)
Glossary
Retiring Allowance
A retiring allowance is an amount received on or after an employee retires in recognition of his or her years of service, or an amount received on or after termination of employment as compensation for loss of employment. There are specific income tax rules relating to retiring allowances.
"Retiring Allowance" is defined under Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), section 248(1), as:
"[A]n amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received (a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or (b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal, by the taxpayer or, after the taxpayer's death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer." |
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), section 6(1), specifies items that must be included in computing an employee's income for a taxation year. Section 6(1)(a)(iv) gives an exception for any benefit:
"derived from counselling services in respect of: (A) the mental or physical health of the taxpayer or an individual related to the taxpayer, other than a benefit attributable to an outlay or expense to which paragraph 18(1)(l) applies [amount paid by an employer to a trustee under a supplementary unemployment benefit plan], or (B) the re-employment or retirement of the taxpayer." |
The Canada Revenue Agency (CRA) takes the position that a retiring allowance includes both of the following:
- Payments for unused sick-leave credits on termination.
- Amounts individuals receive when their office or employment is terminated, even if the amount is for damages (wrongful dismissal when the employee does not return to work).
It is CRA's policy that a retiring allowance does not include any of the following:
- Salary, wages, bonuses, overtime, and legal fees.
- A superannuation or pension benefit.
- An amount an individual receives as a result of an employee's death (these payments may be treated as death benefits).
- A benefit derived from certain counselling services.
- Payments for accumulated vacation leave not taken before retirement.
- Wages in lieu of termination notice (an amount in lieu of termination notice under the terms of an employment contract or minimum standards legislation).
- Damages for violations or alleged violations of an employee's applicable human rights awarded under human rights legislation, to the extent these amounts are not taxable.
For a further discussion of the CRA's views, see Income Tax Folio S2-F1-C2, Retiring allowances.
A qualifying portion of a retiring allowance may be contributed to a registered retirement savings plan (RRSP). The qualifying portion is the sum of:
- $2,000 per year of service before 1996.
- An additional $1,500 per year of service before 1989 for which no registered pension plan or deferred profit-sharing plan benefits were earned.
Therefore, in certain private mergers and acquisitions transactions, there may be an incremental benefit in allocating a portion of the total consideration payable to individual vendors who have worked for the target corporation since before 1996 to their retiring allowances.
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