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Severance Pay - Is it labeled as retirement income even if being laid off

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  • Dec 13th, 2019 3:16 pm
[OP]
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Nov 1, 2013
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Severance Pay - Is it labeled as retirement income even if being laid off

If someone, 45 years gets laid off after 20 years of work and gets a severance package, will the severance package be considered retirement income?
The severance package was Salary Continuance with all benefits such as Medical Dental etc intact . So salary was deposited in bank every payday just it was during employment.
Shoukd it be labeled retirement income on T4?
14 replies
Member
Jan 16, 2009
359 posts
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Vancouver
Is EI and CPP deducted from the paychecks?
Deal Addict
User avatar
Dec 24, 2007
1167 posts
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BC
For RRSP purposes amounts received on loss of office or employment are considered as a "retirement allowance", which qualifies for $2,000 per year of service prior to 1996 that may be transferred directly to your RRSP regardless of your contribution limit. Your employer would report the amount as a retirement allowance on the T4 (there is a specific box for that) and provide you the option to designate an amount to transfer directly to an RRSP.

It may not apply in your case as 20 years from 2019 = 1999, so none of your years of service would qualify.
[OP]
Banned
Nov 1, 2013
304 posts
41 upvotes
wayneg9999 wrote: Is EI and CPP deducted from the paychecks?
No but I think it should have been. It is not salary continuance otherwise.
WetCoastGuy wrote: For RRSP purposes amounts received on loss of office or employment are considered as a "retirement allowance", which qualifies for $2,000 per year of service prior to 1996 that may be transferred directly to your RRSP regardless of your contribution limit. Your employer would report the amount as a retirement allowance on the T4 (there is a specific box for that) and provide you the option to designate an amount to transfer directly to an RRSP.

It may not apply in your case as 20 years from 2019 = 1999, so none of your years of service would qualify.
From what I have read on a gov site, salary continuance income is treated as regular income. But I certainly would like to know if there are any others on this board whose severance salary continuance meant zero rrsp room for next year.
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Dec 24, 2007
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Louking wrote: From what I have read on a gov site, salary continuance income is treated as regular income. But I certainly would like to know if there are any others on this board whose severance salary continuance meant zero rrsp room for next year.
Don't understand what you mean? It's employment income like any other amount received from employer. How does this affect RRSP room as it is included as earned income as is all employment income.
[OP]
Banned
Nov 1, 2013
304 posts
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WetCoastGuy wrote: Don't understand what you mean? It's employment income like any other amount received from employer. How does this affect RRSP room as it is included as earned income as is all employment income.
It was labeled as retirement income, got taxed as usual but generated rrsp room of $0 despite it being a six figures.
I believe salary continuance is considered employment income, not retirement income
Sr. Member
Jan 1, 2017
873 posts
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Louking wrote: It was labeled as retirement income, got taxed as usual but generated rrsp room of $0 despite it being a six figures.
I believe salary continuance is considered employment income, not retirement income
How do you know it generated RRSP room of $0?
[OP]
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Nov 1, 2013
304 posts
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ProductGuy wrote: How do you know it generated RRSP room of $0?
because that is what revenue Canada has declared on my tax return.
Sr. Member
Jan 1, 2017
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Louking wrote: because that is what revenue Canada has declared on my tax return.
Is that 2018 or 2019 tax return? 2019 rrsp room would not be available yet as the year hasn’t closed.
[OP]
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ProductGuy wrote: Is that 2018 or 2019 tax return? 2019 rrsp room would not be available yet as the year hasn’t closed.
2018 of course
Income 100000
Taxed $30000
earned income $0
rrsp limit $0
Welcome to Canada!
Sr. Member
Jan 1, 2017
873 posts
679 upvotes
Louking wrote: 2018 of course
Income 100000
Taxed $30000
earned income $0
rrsp limit $0
Welcome to Canada!
Call CRA and ask why.
[OP]
Banned
Nov 1, 2013
304 posts
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ProductGuy wrote: Call CRA and ask why.
I did and was told that employer labeled income as retirement income instead of earned income. Hence the question on the forum - Is salary continuance considered retirement income or earned income?
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Dec 24, 2007
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Louking wrote: I did and was told that employer labeled income as retirement income instead of earned income. Hence the question on the forum - Is salary continuance considered retirement income or earned income?
Maybe your employer screwed up the designation as retirement allowance may be eligible (Box 66 of T4) or non-eligible (Box 67 of T4). If it is eligible (i.e. for # of years prior to 1996) it would be in Box 66, otherwise it should be in Box 67.

If it is in Box 66, since you can transfer it directly to an RRSP without regard to contribution room, it would not be included in "earned income". If it is Box 67, it cannot be transferred to an RRSP and would be subjected to the normal rules.

See CRA comments on Transferring Retiring Allowance
[OP]
Banned
Nov 1, 2013
304 posts
41 upvotes
WetCoastGuy wrote: Maybe your employer screwed up the designation as retirement allowance may be eligible (Box 66 of T4) or non-eligible (Box 67 of T4). If it is eligible (i.e. for # of years prior to 1996) it would be in Box 66, otherwise it should be in Box 67.

If it is in Box 66, since you can transfer it directly to an RRSP without regard to contribution room, it would not be included in "earned income". If it is Box 67, it cannot be transferred to an RRSP and would be subjected to the normal rules.

See CRA comments on Transferring Retiring Allowance
Thanks for the link which is quite useful. I am not sure why anyone in their right mind would designate salary continuance as retiring allowance particularly when the person is being laid off due to shortage of work.
I was hoping to come across similar case from a fellow RFDian. After all I can't be the only person to have received severance as salary continuance.
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Louking wrote: Thanks for the link which is quite useful. I am not sure why anyone in their right mind would designate salary continuance as retiring allowance particularly when the person is being laid off due to shortage of work.
Lots of terms defined in the Income Tax Act are not what the general meaning of the words would suggest. Retirement Allowance is one of those, which is defined as either of the following: a) an amount received on or after “retirement” of a taxpayer from an office or employment in recognition of the taxpayer’s long service, or b) an amount received in respect of a loss of office or employment, including an amount received on account of or in lieu of damages.

(a) is what you would normally think it should apply to, i.e. on retirement (b) is what yours would fall under, i.e. loss of employment

Income Tax is law and when it comes to legal stuff, you have to look at the fine print, like how "unlimited internet" can be defined to mean by some ISPs to mean "only 20Gigs" and not what the term "unlimited" would suggest. "Who in the right mind", except lawyers, would do that.

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