Since 2011 (for the 2010 tax year), retiring allowances are reported on the T4 slip instead of the T4A slip.
A retiring allowance (also called severance pay) is an amount paid to officers or employees when or after they retire from an office or employment, in recognition of long service or for the loss of office or employment.
A retiring allowance includes:
- 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 (wrongful dismissal when the employee does not return to work).
A retiring allowance does not include:
- salary, wages, bonuses, overtime, and legal fees;
- a superannuation or pension benefit;
- an amount an individual receives as a result of an employee's death (these payments may be treated as death benefits);
- a benefit derived from certain counselling services;
- payments for accumulated vacation leave not taken before retirement;
- wages in lieu of termination notice; and
- damages for violations or alleged violations of an employee's applicable human rights awarded under human rights legislation, to the extent these amounts are not taxable. For more information, see Interpretation Bulletin IT 337R4 – CONSOLID, Retiring Allowances.
If you pay a retiring allowance to a resident of Canada, deduct income tax from any part you pay directly to the recipient using the lump-sum withholding rates.
Retiring allowances must be taxed even if a recipient's total earnings received or receivable during the calendar year, including the lump-sum payment, are less than the total amount claimed on his or her Form TD1, Personal Tax Credits Return.
Combine all retiring allowance payments that you have paid or expect to pay in the calendar year when determining the withholding rates for lump-sum payments.
If you pay a retiring allowance to a non-resident of Canada, withhold 25% of the retiring allowance (subject to various tax conventions and agreements). Send this amount to the receiver general on the non-resident's behalf. For more information, see Guide T4061, NR4 – Non-Resident Tax Withholding, Remitting, and Reporting.
Do not deduct CPP contributions or EI premiums from retiring allowances.
Transfer all or part of a retiring allowance
There are situations when a person can transfer all or part of a retiring allowance to a registered pension plan (RPP) or a registered retirement savings plan (RRSP). For more information, go to Transfer of a retiring allowance.
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Forms and publications
- Guide RC4120, Employers' Guide – Filing the T4 Slip and Summary
- Guide RC4157, Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary
- Guide T4145, Electing Under Section 217 of the Income Tax Act
- Guide T4061, NR4 – Non-Resident Tax Withholding, Remitting, and Reporting
- Interpretation Bulletin IT-337R4 – CONSOLID, Retiring Allowances
- Interpretation Bulletin IT-499, Superannuation or Pension Benefits
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