A retiring allowance includes payment for loss of office or employment or payment after retirement in recognition of long service.

These payments are eligible for tax-free transfer to your own (not a spousal) RRSP without affecting your regular earned income contribution room. The eligible transfer amount is limited, subject to the following formula:

  • $2,000 times the number of calendar years you were employed by the particular employer prior to 1996, plus
  • $1,500 times the number of calendar years prior to 1989 in which no employer contributions to a pension plan or DPSP were vested to you at the time the allowance was paid.

Note that the formula uses “calendar years” in the calculation: thus, any part of a calendar year counts as one year of service.

Typically, your employer will communicate how much is eligible under this formula, although you would be wise to review their calculation.

The transfer into your RRSP may be direct (employer to your RRSP) or indirect (employer to you, and then to your RRSP). However, in the latter case, tax will be with-held at source, and you will need to recoup it through your annual tax filing.

Planning Considerations

  • Be sure the calculation of your eligible amount is correct.
  • Your severance offer may give you the choice of remaining on salary for a specified period versus taking the lump sum buyout. The former choice likely would keep you on the benefits program, while the latter would not. So, you need to assess the value of this difference in making your choice.
  • It is usually wiser to opt for the direct transfer of the eligible amount into your RRSP. If you successfully find new employment, that money stays in your RRSP as a one-time lump-sum infusion. If you remain unemployed for a while, you can draw the money out as you need it as a de-registration.