Examples – Retiring allowance calculations
In November 2019, you pay Bruno, your ex-employee, a retiring allowance of $50,000. He worked for you from 1986 to 2019 (33 years, including part-years of service). He did not contribute to a pension plan or DPSP.
Calculate the amount of retiring allowance eligible for transfer as follows:
Step 1: $2,000 × 10 years (from 1986 to 1995, including part-years) = $20,000
Step 2: $1,500 × 3 years (from 1986 to 1988, including part-years) = $4,500
Step 3: Add the result of step 1 ($20,000) + the result of step 2 ($4,500). The total amount eligible for transfer is $24,500.
You can no longer transfer $2,000 per year of service to an RPP or RRSP for 1996 and later years.
Bruno is allowed to transfer $24,500 directly into an RPP or RRSP with no tax deductions required.
The non-eligible amount of $25,500 ($50,000 – $24,500), the difference between the allowance paid and the maximum eligible for transfer, could be transferred directly to Bruno's RRSP without tax deductions if he gives you a written statement saying that the amount is within his RRSP deduction limit.
Example 2 – Calculation of an amount of remuneration on which you have to deduct tax at source
Colette is retiring. She is paid a retiring allowance of $35,000 in recognition of long service, of which $12,000 is eligible for transfer to her RRSP under paragraph 60(j.1) of the Income Tax Act. Colette wants you to transfer the total amount of the eligible retiring allowance ($12,000) to her RRSP. She also requests that you transfer an additional $11,000 to her RRSP and gives you a written statement indicating that her RRSP deduction limit is $11,000.
You have to calculate the amount of remuneration that requires tax deductions at source as follows:
Step 1: Determine the amount of remuneration that does not require tax
Add the amount of retiring allowance that is eligible for transfer to the RRSP ($12,000) and the amount that can be transferred to an RRSP based on Colette's deduction limit ($11,000). The amount of retiring allowance that does not require tax deductions is $23,000.
Step 2: Determine the amount of the retired allowance that requires tax
Subtract the result of step 1 ($23,000) from the entire amount of retiring allowance ($35,000). The result ($12,000) is the amount of remuneration that requires tax deductions at source.
You do not need a letter of authority from the CRA to reduce the tax withheld from the amounts of the payment that were transferred to Colette's RRSP because she gave you a written statement.
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