Defer Tax on Severance or Retiring Allowance

Income Tax Act s. 60(j.1)

If you are receiving severance or retiring allowance in relation to employment that was started prior to 1996, then a portion of amounts received can be transferred directly to a Registered Retirement Savings Plan (RRSP), so that income tax need not be deducted, and the amount is not taxable. This portion is considered an "eligible retiring allowance". The allowed transfer amounts are:

	$2,000 for each year or part year of service with the employer before 1996, and
	an additional $1,500 for years of service which occurred before 1989, in which the employer's contributions to a company pension plan had not vested in the employee. Thus, up to $3,500 per year can be transferred for years of service prior to 1989.

The total amount transferred to the RRSP cannot exceed the severance or retiring allowance received. RRSP contribution room is not needed in order to do the transfer, because it isn't treated as an RRSP contribution. It is just transferred tax-free into the RRSP.

If the total amount transferred to the RRSP exceeds the eligible severance or retiring allowance, RRSP contribution room will be needed for the excess, which is treated as an RRSP contribution.

Years of part time employment also qualify as years of service. Even if only one day is worked in the year this qualifies as a year of service.

If the severance or retiring allowance is not transferred directly into an RRSP, the qualifying amount can still be contributed to the RRSP in order to be allowed as a deduction on the tax return for the year it was received. To qualify, the contribution must be made within 60 days of the end of the calendar year in which it was received.

Claiming the Eligible Retiring Allowance on Your Tax Return

Your T4 will include the eligible retiring allowance in box 66. Non-eligible retiring allowances are in box 67. The box 66 amount will go on line 13000 (line 130 prior to 2019) of your tax return. It must also be included in 2 places on Schedule 7 of your tax return:

	on line 2 or 3 as a contribution, depending on the date of the transfer, and
	on line 14 as a Designated Transfer

Once Schedule 7 is completed, the eligible retiring allowance is deducted on Line 20800 (RRSP/PRPP deduction, line 208 prior to 2019). If Schedule 7 is not completed as above, tax will be calculated on the eligible retiring allowance, and contribution room will be reduced by the amount of the transfer.

Quote from CRA's 2020 Schedule 7 re Line 14 - Transfers: You may have reported income on line 11500, 12900, or 13000 of your 2020 return. If you transferred certain types of this income to your RRSP, PRPP and SPP on or before March 1, 2020, you can claim the corresponding amount on line 14, as a transfer. Claiming the transfer ensures that your RRSP deduction limit is not reduced by that amount.

What if the eligible retiring allowance is received in the first 60 days of the taxation year (say 2021), so a tax receipt is received for that period (normally has to be reported on Schedule 7 for the prior tax year, 2020), but the eligible retiring allowance won't be on a T4 until the following year? A designated transfer must be reported in the same tax year as the eligible retiring allowance is received (2021). In this situation:

the transfer to the RRSP is reported on Schedule 7 of the 2020 tax return as a contribution in the first 60 days of the current taxation year. It is not reported as a designated transfer.

the RRSP amount is not deducted, but carried forward to the following year. This way it does not reduce the contribution room, and is available the following year for the designated transfer.

in the following year

	the T4 for the eligible retiring allowance is reported, and the designated transfer of the RRSP amount is reported on Schedule 7 line 14.
	any contribution in excess of the eligible retiring allowance is used as an RRSP deduction, on line 15 of Schedule 7.

Although RRSP contribution room isn't "used" in this scenario, if it is not "available" in 2021 your Notice of Assessment will show that you have an excess contribution. However, as long as the excess contribution is less than or equal to the eligible part of your retiring allowance plus $2,000 (the allowed excess contribution), you do not actually have an excess contribution. Eligible retiring allowances are noted as exclusions from the calculation on form T1-OVP for excess contributions.

If you failed to report the transfer in the first 60 days of the tax year on your prior year return, see the article on changing your tax return once you have already filed it.

Non-Eligible Retiring Allowance

Income Tax Act s. 56(1)(a)(ii)

A non-eligible retiring allowance or severance payment will be included in box 67 on your T4 slip, and will be reported on line 13000 of the tax return, as are eligible retiring allowances.

A retiring allowance or severance payment is taxable in the year in which it is received by the employee.

TaxTips.ca Resources

I didn't record my RRSP contributions on my previous year's tax return. What do I do?

Changing / amending your tax return

Canada Revenue Agency (CRA) Resources

Income Tax Folio S2-F1-C2, Retiring Allowances

Transfer of a retiring allowance

T1-OVP Individual Tax Return for Excess Contributions

T4001 Employers' Guide - Payroll Deductions and Remittances - Retiring Allowances

Line 20800 (line 208 prior to 2019) RRSP/RPP deduction

Schedule 7 RRSP Unused Contributions, Transfers, and HBP or LLP Activities - explains when this schedule has to be completed

T4040 RRSPs and Other Registered Plans for Retirement

Tax Tip: Defer tax by transferring your severance or retiring allowance to an RRSP.

Revised: September 20, 2024