There have been a number of mills shut down in our region over the past few years. This article just touches on a few ideas which might help in taking a severance package.
Rolling a severance over to an RSP
A retiring allowance is generally an amount paid to an employee upon termination of employment or early retirement. There are special Canadian tax rules that apply to the eligible portion of a retiring allowance. As a result, an employer is required to determine the eligible retiring allowance and non-eligible retiring allowance.
Eligible retiring allowance
Special tax rules allow the transfer of an eligible retiring allowance to your own RSP without affecting your regular RSP contribution room. Your employer is not required to withhold tax on any portion of the eligible retiring allowance that is transferred directly to your RSP. Therefore, you should consider advising your employer to make a direct transfer of the eligible retiring allowance to your RSP. Any portion of the allowance received in cash will be subject to withholding tax between 10 to 30 per cent.
Even if you receive the allowance in cash net of withholding tax, you can still benefit from the special rollover rules. You can make an RSP contribution for the gross amount of the eligible retiring allowance. However, you must make this contribution to your own RSP within 60 days from the end of the year you received your eligible retiring allowance; otherwise, this
opportunity is lost forever.
Non-eligible retiring allowance
Although the non-eligible retiring allowance does not qualify under the special rollover rules, you can still make an RSP contribution to your own RSP or to a spousal RSP provided you have sufficient RSP contribution room.
If your employer is willing, you can advise them to make a direct RSP contribution based on your RSP contribution room. A direct transfer avoids the requirement of your employer to deduct withholding tax. However, your RSP contribution room will be reduced by the amount of the contribution.
Your employer may require reasonable proof that you have available RSP contribution room in order to feel comfortable with not withholding tax. A copy of your Notice of Assessment for the previous year showing your RSP deduction limit might be sufficient for this purpose.
Even if you provide this proof, it is at your employer's discretion on whether they are willing to make a direct
transfer to your RSP.
Even if you receive the non-eligible portion of your retiring allowance in cash you can still reduce your taxable income if you contribute the net amount to your RSP provided you have sufficient RSP contribution room and you make the RSP contribution within 60 days from the end of the year you received the allowance.
If you have withholding tax deducted and you make an RSP contribution, you will receive a refund of the withholding tax, or it will offset the tax owed on other income resulting in less taxed owed on your personal income tax return.
There are many other considerations to review in this matter, and a qualified tax specialist should be consulted before taking decisive action.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected].
