Personal Tax -> Severance or retiring allowance
RRSPs -> Severance or retiring allowance
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. This portion is considered an "eligible retiring allowance". The allowed transfer amounts are:
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.
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.
Your T4 will include the eligible retiring allowance in box 66 or box 68. Non-eligible retiring allowances are in box 67 or 69. The box 66 amount will go on line 130 of your tax return. It must also be included in 2 places on Schedule 7 of your tax return:
Once Schedule 7 is completed, the eligible retiring allowance is deducted on Line 208 (RRSP/PRPP deduction). 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 2018 Schedule 7 re Line 14 - Transfers: You may have reported income on line 115, 129, or 130 of your 2018 return. If you transferred certain types of this income to your RRSP, PRPP and SPP on or before March 1, 2019, you can claim the corresponding amount on line 14, as a transfer. This ensures that the transferred amount does not reduce your RRSP/PRPP deduction limit.
What if the eligible retiring allowance is received in the first 60 days of the taxation year (say 2019), so a tax receipt is received for that period (normally has to be reported on Schedule 7 for the prior tax year, 2018), 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 (2019). In this situation:
- the transfer to the RRSP is reported on Schedule 7 of the 2018 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.
Although RRSP contribution room isn't "used" in this scenario, it must be "available" in 2019 so that there is no excess contribution.
Canada Revenue Agency (CRA) Resources:
Tax Tip: Defer tax by transferring your severance or retiring allowance to an RRSP.
Revised: March 12, 2019
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