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Retiring Allowances
An employer can pay and a retiring employee a retiring allowance or termination payment (which the employer deducts as a business expense) and the employee can rollover the amount paid to an RRSP on a tax-deferred basis. This means the employee includes the amount received in income, but gets a deduction on their tax return for the amount rolled over to the RRSP.
Click HERE for the amounts eligible for retirement allowances. Click HERE for the CRA document discussing retirement allowances.
There are some unusual claims which CRA has accepted. One example is the farm wife who helped in the farming activities of the husband's farm proprietorship, but only received a T4 for 3 out of 34 years which were farmed. CRA accepted the 34 years as the period of service and the result was a large amount that could be rolled over to the RRSP.
A retirement allowance can be paid in situations where the employee has not completely retired from other employment. As long as an employee is retired from the company paying the retirement allowance, the employee can subsequently be employed from an unrelated company. However, there are some conditions that will have to be met. For example, the employee should ensure he is not an employee, shareholder, director or officer of the payor employer after the payment and the employee should ensure he does not exercise any other control over the payor employer after the payment. Tax planning with a Chartered Accountant in unusual cases is required.
Tax planning opportunities exist for owner-managed businesses where shareholders were employed by their corporations. Retiring allowances can be paid out of surplus cash and the corporation becomes more attractive to sell since it's value has decreased becoming more affordable to a purchaser.
CRA has noted that retiring allowances may be paid in instalments provided the recipient makes this election prior to being entitled to the amount. The amounts are taxed as the instalments are received. This planning technique is very useful in cases where you want to income split between taxation years to minimize the amounts taxed at your highest personal marginal tax rates. Additionally, if a corporation does not decide to pay a retiring allowance until many years after an employee retires, this delay would not in itself prevent the amount from being classified as a retiring allowance. This planning technique does not work if an employee is entitled to salary or other remuneration but defers the receipt of the amount. The time of entitlement to the employee dictates when it is taxable to the employee.
CRA has also noted that where employment is terminated and a retirement allowance is paid and subsequently the former employer offers a new short-term contract for employment to the former employee, the original retirement payment would still be considered a retiring allowance as long as there was no offer of new employment at the time that the individual ceased employment.
Finally, CRA has noted that there is nothing that prevents previous years of employment with a foreign employer from being an eligible year of service.
Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice.
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