A standard element of compensation packages in Canada is a retiring allowance for long-tenured officers or employees of a corporation. Credit for unused sick leave may also be included in the amount.
Not included in the retiring allowance are pension benefits, vacation pay, salary, wages, bonuses, overtime or wages in lieu of termination notice.
The retiring allowance is also available to employees or principals of corporate farming operations says Grant Diamond, a senior tax consultant with FBC, a tax advisory service with over 60 years of service to the farm community. The corporate farm had to exist before 1995 and the farmer had to be in the employ of the corporation before that year as well. Taking advantage of the retiring allowance is a good means of transferring funds from the farm tax-free. Depending on how you invest the funds it is one of the very few tax shelter opportunities allowing you to defer taxes on most if not all of the amount.
The retiring allowance can be rolled over to a registered pension plan (RPP) or your registered retirement savings plan (RRSP) 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 only be made to your RRSP and may not be made to a spousal RRSP.
There are limits, however, to the amount that can be transferred.
If your employment started before January 1, 1996 you can rollover all or a portion of your retiring allowance tax-free. Unfortunately, if you started work with the corporation after 1995, the rollover provisions do not apply.
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 factors listed below place limits on 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 RPP or DPSP on your behalf.
- In addition, you get to shelter $2,000 for each year of service between 1989 and 1995 regardless of RPP or DPSP contributions.
As an example, you were given a retiring allowance of $30,000 in 2015, the year of your retirement. Your earned income in 2014 was $66,000 with a pension adjustment reported by your employer in 2014 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 (2 years x $3,500 for years 1987 and 1988). Added to that amount would be 7 years times $2,000 for years 1989 to 1995 or $14,000. That means you could transfer a total of $21,000 of your $30,000 retiring allowance plus your annual RRSP contribution for 2015.
Grant Diamond is a tax specialist with FBC, a firm dedicated to providing farmers and small business owners with expert tax services and advice for over 60 years. FBC has branches in BC, AB, SK, MB, ON and NS to serve its 50,000 Members. FBC also provides financial & estate planning. To learn more about FBC, visit www.fbc.ca. If you have any questions regarding this article, email fbc @ fbc.ca or call toll-free 1-800-265-1002.
Accurate as of April 08, 2015