Hello, my name is Nicolae and I am
your presenter today. Welcome to our webinar on
special payments and the end of employment. This
is the last of our three-part webinar series
for this period that began in January 2017.
Today's webinar is intended for you if you
have a basic knowledge of payroll and would
like to increase your knowledge of certain special
payments to employees when they terminate their
employment. Today we will discuss the following subjects
termination of employment salary in lieu of termination
notice retiring allowances record of employment, also known
as an ROE. We will start by talking
about termination of employment. There are many reasons
why an employee might leave
their job. The reason can affect how we
tax certain payments to employees on termination of
employment. Some of the most common reasons for
an employee to leave their job are retirement
resignation layoff or dismissal. If an employee leaves
their job for one of these reasons, we
suggest that the employer calculate the employee's total
annual remuneration
up to the departure date and give the
employee a T4 slip. The employer must keep
a copy of the T4 slip and attach
it to the T4 Summary when sending it
to the CRA on or before the last
day of February of the following year, at
the same time as all of the T4
slips for the year. In addition to the
employee's regular salary, certain other amounts may be
included on their T4 slip
We will be looking at these amounts in
the next few slides. In general, when an
employee is dismissed, the employer must do certain
things as set out in the employee's contract
of employment or in the federal, provincial or
territorial employment labour standards. For example, in the
province of Quebec, the Commission des normes du
travail labour standards board states An employer must
give the employee a written notice of termination
of employment before terminating a contract of employment
or laying off the employee for a period
of more than six months. The length of
time for giving the employee the notice vary
according to the employee's length of uninterrupted service.
For example, an employee with one to five
years of continuous service with an employer must
receive a written
notice of termination two weeks before the employment
ends. An employee's contract of employment can also
include various provisions specifically related to termination of
employment. It is important that employers figure out
which provisions apply to each situation. Now, let's
discuss Wages in lieu of termination notice.
An employer and an employee may agree to
forgo the specified timeframe and for the employee
to leave immediately after being notified of their
dismissal. In this situation, the employer must pay
the employee compensation equal to the salary the
employee would normally have earned between the date
the notice is scheduled to have been sent
and the date their employment ends. This compensation
is known as
'wages in lieu of termination notice' and is
considered employment income. The employer then has to
withhold the usual source deductions CPP/QPP contributions, EI
premiums and income tax. These amounts are part
of the employee's regular income for the pay
period. Let's look at an example. Luke was
dismissed by his
employer. According to his employment contract, his employer
has to give him three weeks' termination notice.
When Luke was notified of his dismissal, he
and his employer decided to end his employment
immediately. They agreed that Luke would receive an
amount equal to three weeks' salary and would
be able to leave immediately. Given that Luke's
employment contract said
that his employer had to give him three
weeks' termination notice before ending his employment, Luke
should have continued working for three weeks after
being notified of his dismissal. But it was
better for Luke to leave the employment immediately.
The amount that the employer pays to Luke
is considered wages in lieu of termination notice
and is part of the income he received
during the year.
This amount is reasonable under the circumstances because
it represents the salary Luke would have received
had he continued working. The employer must take
the standard source deductions from this amount and
include the amount in box 14 of Luke's
T4 slip as employment income. We will now
look at retiring allowances. Another amount that can
be paid to an employee
on termination of employment is a retiring allowance,
also known as a severance benefit. The employer
pays this amount to an employee in the
following two situations on termination of the individual's
office or employment, even if the amount is
received because of damages or following an order
or a judgment of a tribunal or in
recognition of the individual's long service on or
after retirement from
employment. Contracts of employment and collective agreements usually
specify the payments an employee should receive on
retirement. In deciding whether an amount qualifies as
a retiring allowance, the CRA considers a termination
of employment for any reason as being retirement
or loss of employment. The CRA usually considers
the term 'long service' to mean the total
number of years in an employee's career
with a particular employer or affiliated employers. The
amount can include many different types of payments,
such as an amount for lost wages or
moral damages. Each payment must be reviewed individually
to determine if it can be considered a
retiring allowance. The retiring allowance is included in
the annual income in the year it was
received. Let's look at this in more detail.
For the amount to be considered a retiring
allowance, an office or employment must be terminated,
and the employment and benefits must end on
a specific day. However, not all payments the
employer makes to the employee on termination of
employment are considered retiring allowances. Some payments may
represent employment income while others may be non-taxable.
This is based on the facts and circumstances
surrounding the payment and on what the payments
were intended to compensate for or replace. Let's
look at a few types of payments to
find out if they're considered retiring allowances. The
two following amounts are considered retiring allowances payments
for unused sick leave credits on termination and
amounts individuals receive when their office or employment
is terminated, even if the amount is for
damages for wrongful dismissal when the employee does
not return to work. A payment for unused
sick leave credits qualifies as a retiring allowance
when the employee receives the payment on or
after retirement in recognition of long service or
for loss of employment.
However, when the employee receives a payment for
unused sick leave credits while still employed, the
payment is considered employment income. The next two
slides list various types of payments that are
not considered retiring allowances. Retiring allowances do not
include the following amounts payments for accumulated vacation
leave
not taken before retirement salary continuance if there
has been no interruption of leave or salary
between when the duties ended and the payments
began loss of employee wages, salary or benefits
if the employee continues to work or returns
to work. These amounts are considered employment income.
It is important not to confuse accumulated vacation
with accumulated sick leave, which are part of
retiring allowances, as we saw in the previous
slide. An employee's salary can continue when a
business closes and the employer continues to pay
the employee's salary even though the employee is
no longer working. This constitutes compensation for loss
of employment. Ongoing health insurance coverage or
accrual of pensionable time show that the employer-employee
relationship is continuing. The following amounts are also
not considered retiring allowances wages in lieu of
termination notice, which are considered employment income. Amounts
received in respect of damages for human rights
violations. In this case, there must be clear
evidence that an employee lost their job as
a
result of a breach in existing human rights
legislation. Payments for damages clearly proven to be
unrelated to the loss of employment, for example,
defamation. A loss of office or employment usually
means that a particular office or employment expired
or was eliminated. However, it can also mean
that an employee lost their source of income.
Examples include a business
that is closing or downsizing or early retirement
incentive plans. In respect of loss of employment
often leads to payments for injuries resulting from
the loss. These payments may be made following
an order or judgment for wrongful dismissal or
an agreement between the parties in question. The
expression in respect of implies a connection between
the loss of employment
and the payment that results thereafter. In other
words, the main purpose of the payment is
to compensate the individual for the loss of
employment. The courts have set out the two
following questions to determine if such a connection
exists Question 1 Would the employee have received
the amount if the employee didn't lose the
employment?
Question 2 Was the purpose of the payment
to compensate for a loss of employment? Only
if the answer to the first question is
no and the answer to the second question
is yes, then the amount received is considered
a retiring allowance. If the answer to the
first question is yes, the payment is not
a retiring allowance. It's important to know the
answers to these questions
because the deducting and reporting requirements differ based
on the purpose of the payment. The following
list includes some of the payments that relate
to a loss of employment and that can
be considered a retiring allowance, as long as
the employee does not return to their employment
any compensation on account of damages for loss
of employment special damages
general damages for loss of self-respect humiliation mental
anguish hurt feelings, etc. To find out what
type of payment the employee received, you have
to review the relevant facts and documents of
each particular case. When an employee receives a
payment in lieu of severance pay, the payment
is considered employment income if the employee receives
it while he or she is
still working. This type of situation arises when
severance benefits will no longer accumulate in the
future. For example, consider the case of employees
covered by a collective agreement who accumulate severance
benefits that will be paid on resignation or
retirement. The benefit is equal to one week
of pay for every year of service. A
new collective agreement is signed, which eliminates the
accumulation of severance benefits
as of a specific date. Severance benefits accumulated
up to that date will be paid in
accordance with the terms of the severance provision.
Employees are given the choice of receiving an
immediate lump-sum payment based on their current rate
of pay in lieu of severance, or waiting
to receive the severance payment on retirement. If
an employee chooses the immediate payment, it is
considered employment income because the
employee received the sum while he or she
is still employed. If an employee chooses to
wait until retirement to receive the payment, the
amount will be considered a retiring allowance because
it was received on or after the employee's
retirement date. Once you have decided that an
amount is a retiring allowance, you can decide
whether part of the amount is
eligible to be transferred directly to an RRSP.
The eligible portion of a retiring allowance is
based on the number of years of employment
before 1996 with the employer who made the
payment or the person related to the employer.
The eligible portion can be transferred directly to
an RPP or an RRSP under paragraph 60
j.1
of the Income Tax Act to defer its
taxation. Given that this situation is increasingly rare,
we won't spend much time on the subject.
For more information, see Chapter 6 of guide
T4001, Employers' Guide - Payroll Deductions and Remittances.
The non-eligible portion of the payment can only
be transferred to an RRSP if the employee
has remaining RRSP contribution
room. This type of transfer is more common.
You will find all the necessary information on
eligible and non-eligible amounts in Guide T4001. Amounts
paid as a retiring allowance are not considered
pensionable or insurable income because they are not
considered employment income. Do not deduct CPP/QPP contributions
or EI premiums from
these payments. However, the employer must withhold the
income tax because the income is taxable. To
do so, use the rates for lump-sum payments
in effect at the time the employee receives
the payment. If the retiring allowance will be
paid in several instalments during the year, the
employer must add all the lump-sum payments paid
or intends to pay during the year to
the employee to determine which rate to use.
We will look at an example to clarify
this later in the presentation. The following lump-sum
withholding rates apply, as set out in the
Income Tax Regulations 10% on amounts up to
and including $5,000 5% for Quebec 20% on
amounts over $5,000 up to and including $15,000
10% for Quebec
30% on amounts over $15,000 15% for Quebec
. The rates for lump-sum payments combine both
federal and provincial rates, except for the Province
of Quebec. The 5, 10 and 15% rates
for Quebec represent only the federal withholding rates.
Employers must contact Revenu Québec to find out
which provincial lump-sum withholding
rates to use. Here's an example Braeden is
retiring and his employment contract states that the
employer will pay him an allowance in recognition
of his long service when he retires. He
is entitled to $40,000. This amount will be
paid in three instalments the first in June
for $20,000 the second in September for $10,000
the third in December, also for $10,000. The
employer must now figure out the withholding rate
to use for each payment. For this example,
we will use the Province of Ontario. As
we saw before, Braeden's employer must add all
the lump-sum payments that have been or will
be paid for the calendar year to determine
which rate to use. In our example, the
total of the lump-sum
payments for the year is $40,000. Given that
the total amount is over $15,000, the employer
has to use the 30% rate for each
payment, even though two of the payments are
less than $15,000. For the June payment, the
employer will deduct $6,000 $20,000 30% . For
the September
and December payments, the employer will deduct $3,000
$10,000 30% . The employer will withhold a
total of $12,000 from the retiring allowance paid
to Braeden during the year. The tax deducted
could be less than $12,000 if Braeden can
transfer part of his retiring allowance into his
RRSP.
This depends on whether he still has contribution
room in his RRSP and if the amount
was transferred before he receives the payment, or
if part of the amount was eligible for
a direct transfer to an RPP or RRSP,
because of the years he worked with the
employer before 1996. The employer must report the
amount of the retiring allowance paid on the
employee's
T4 slip for the year in which the
payment was made. If part of the retiring
allowance is eligible for transfer to an RPP
or RRSP, enter the amount in the other
information box on the T4 slip using code
66, regardless of whether it has been transferred
to an RPP or an RRSP in the
annuitant's name. Enter the non-eligible portion for transfer
of the retiring allowance
in the other information box on the T4
slip using code 67. The 'Other information' box
appears at the bottom of the T4 slip.
Do not report any part of the retiring
allowance in box 14 of the T4 slip.
We will now examine records of employment.
On termination of employment, regardless of the reason,
the employer must fill out a record of
employment generally in the five days that follow
one of these events the interruption of the
employee's earnings the day the employer becomes aware
of the interruption the date the employee stops
working for the employer. However, special rules may
apply. Service Canada
is responsible for the record of employment. Contact
them to find out more. For more information
on any of the items we talked about
today, visit cra.gc.ca and go to our webpages
for businesses. If you have not already done
so, you can subscribe to our payroll electronic
mailing list at cra.gc.ca/lists.
You'll receive information about our upcoming webinars and
much more. The CRA website also has videos
and recorded webinars for businesses at cra.gc.ca/videogallery, including
a series on payroll for new small businesses
and a series on payroll basics.
You can also listen to our payroll podcast
at cra.gc.ca/socialmedia and follow us on Twitter at
CanRevAgency. The CRA has many tools to help
you understand your responsibilities for termination of employment
and for other payroll obligations.
You can find them on the payroll deduction
pages on our website. Guide T4001, Employers' Guide
- Payroll Deductions and Remittances, may especially be
helpful. That's all the time we have. Thank
you for joining me today. I hope this
webinar helped you better understand special payments related
to an employee's termination of employment and how
to handle a termination of employment. Thank you.