A retiring allowance for long-tenured officers or employees of a corporation is a standard element of compensation packages in Canada.
Credit for unused sick leave may also be included in the amount.
However, retiring allowances don’t include pension benefits, vacation pay, salary, wages, bonuses, overtime or wages in lieu of termination notice.
The allowance is also available to employees or principals of corporate farming operations.
To be eligible, the corporate farm must have existed before 1995 and the farmer must have been in the employ of the corporation before that year.
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Taking advantage of the retiring allowance is a good way to transfer funds from the farm tax-free.
Depending on how you invest the funds, it is one of the few tax shelter opportunities that allow you to defer taxes on most if not all of the amount.
The retiring allowance can be rolled over to a registered pension plan or Registered Retirement Savings Plan without affecting your contribution room for the same year. This is because the rollover is made outside the general RRSP rules. Such a rollover can be made only to your RRSP and may not be made to a spousal RRSP.
However, there are limits to the amount that can be transferred.
If your employment started before Jan. 1, 1996, you can roll over all or a portion of your retiring allowance tax free.
Unfortunately, the roll-over provisions do not apply if you started work with the corporation after 1995.
The size of your retiring allowance will partially determine how much will qualify for favourable tax treatment.
The exact amount depends on a number of factors. If your retiring allowance is less than these factors allow, all of it may be transferred. If it is greater, the following factors limit the amount you may shelter:
- The number of years before 1989 you were employed by the corporation times $3,500. However, this amount is reduced to $1,500 per year if your employer contributed to an registered pension plan or Deferred Profit Sharing Plan on your behalf.
- In addition, you get to shelter $2,000 for each year of service between 1989 and 1995 regardless of registered pension plan or DPSP contributions.
Let’s say you were given a retiring allowance of $30,000 in 2014, the year of your retirement.
Your earned income in 2013 was $66,000 with a pension adjustment reported by your employer in 2013 of $10,800.
The earned income and the pension adjustment amount will be used in calculating your regular RRSP room and has no tax implication regarding this special transfer.
So, if you were employed since 1987, you could shelter $7,000 of your retiring allowance (two years multiplied by $3,500 for years 1987-88). Added to that amount would be seven years times $2,000 for years 1989-95, or $14,000.
That means you could transfer $21,000 of your $30,000 retiring allowance plus your annual RRSP contribution for 2014.
