How the CRA defines and taxes a retiring allowance (severance pay), what your employer withholds, how much can go
into your RRSP tax-free, and where it goes on your return.
A retiring allowance is fully taxable in the year you receive it, at your marginal rate, but no CPP or EI comes off it. Your employer withholds tax at CRA's lump-sum rates (10% on $5,000 or less, 20% on $5,001 to $15,000, 30% on $15,001 or more; 5%/10%/15% federal plus 14%/19%/19% Quebec in Quebec), and you settle the difference on line 13000 of your return. Up to $2,000 per year of service before 1996 can go to your RRSP tax-free without RRSP room.
The CRA's definition: an amount paid on or after you retire from an office or employment, in recognition of long
service, or for the loss of the office or employment. You do not have to be retiring; a layoff payment qualifies.
Is a retiring allowance
Severance pay for losing your job
Payment for unused sick-leave credits on termination
Damages for wrongful dismissal when you do not return to work
A payment after retirement or termination in recognition of service
A lump-sum settlement with no breakdown (generally)
Is not (taxed as employment income or otherwise)
Pay in lieu of termination notice
Salary continuance, salary, bonuses and overtime
Accumulated vacation pay not taken
Pension or superannuation benefits
Amounts paid because of an employee's death (death benefits)
The split matters: pay in lieu of notice goes through payroll with CPP, EI and regular tax tables, while a retiring
allowance has no CPP or EI and only lump-sum withholding. Your provincial employment standards decide what you are
owed; the severance pay calculator estimates the minimum.
Retiring allowance withholding rates
The employer picks one rate from the total retiring allowance paid or expected in the calendar year and applies it to
the whole amount paid to you. Nothing is withheld on a part transferred directly to your RRSP.
Retiring allowance in the year
Outside Quebec
Quebec: federal
Quebec: provincial
Quebec: total
$5,000 or less
10%
5%
14%
19%
$5,001 to $15,000
20%
10%
19%
29%
$15,001 or more
30%
15%
19%
34%
A non-resident of Canada has 25% Part XIII tax withheld instead, unless a tax treaty
lowers it. The withholding is a prepayment: on a large allowance the top 30% is usually below your marginal rate,
so many people owe more when they file.
The eligible retiring allowance RRSP rollover
If you worked for the employer (or a related employer) before 1996, part of the allowance is "eligible" and can be
transferred to your own RRSP or RPP without using any RRSP room:
$2,000 for each year or part-year of service before 1996, plus
$1,500 for each year or part-year before 1989 in which none of the employer's pension or DPSP contributions were vested in you.
CRA's example
A $50,000 allowance after working from 1986 to 2025, with no vested employer pension before 1989:
10 years before 1996 × $2,000 plus 3 years before 1989 ×
$1,500 = $24,500 eligible
(T4 code 66), and $25,500 non-eligible (code 67).
The eligible part cannot go to a spousal RRSP, and nothing can be transferred after the year you turn 71. The
non-eligible part (all of it, if you started after 1995) can still be sent directly to your RRSP or a spousal RRSP
with no tax withheld, up to your unused RRSP deduction limit.
Worked example: $50,000 in Ontario
You earned $60,000 in 2026 before your job ended and receive a $50,000 retiring allowance,
with 5 years of service before 1996.
Taken in cash, the employer withholds 30%, $15,000. The real tax is
$15,243 (30.5%), so you owe $243 more at filing.
Rolling the eligible $10,000 into your RRSP cuts the tax to $12,055, a saving of
$3,188, and nothing is withheld on the rolled-over part.
On your return: $50,000 on line 13000, $10,000 deducted on line 20800 (and line 24640 of Schedule 7).
Tax on a retiring allowance by amount and province
Final 2026 tax on the allowance on top of a $60,000 salary. Each page shows the withholding, the balance at
filing at six salary levels, and the RRSP and timing options.
A retiring allowance is fully taxable in the year you receive it, at your marginal rate, but no CPP or EI comes off it. Your employer withholds tax at CRA's lump-sum rates (10% on $5,000 or less, 20% on $5,001 to $15,000, 30% on $15,001 or more; 5%/10%/15% federal plus 14%/19%/19% Quebec in Quebec), and you settle the difference on line 13000 of your return. Up to $2,000 per year of service before 1996 can go to your RRSP tax-free without RRSP room.
What is a retiring allowance according to the CRA?
An amount paid on or after you retire from an office or employment, in recognition of long service, or for the loss of the job. It includes severance pay, payments for unused sick-leave credits on termination, and damages for wrongful dismissal when you do not return to work. It does not include salary, bonuses, pay in lieu of notice, salary continuance, accumulated vacation pay, pension benefits or death benefits.
What is the difference between a retiring allowance and severance pay?
For tax purposes, none: severance pay is a retiring allowance. The difference that matters is pay in lieu of notice. Wages in lieu of termination notice are employment income, with CPP and EI deducted and regular payroll tax, while a retiring allowance has only income tax withheld at the lump-sum rates. If a settlement has no breakdown, CRA generally treats the whole amount as a retiring allowance.
What is the withholding tax rate on a retiring allowance?
10% on $5,000 or less, 20% on $5,001 to $15,000, 30% on $15,001 or more, based on the total retiring allowance paid or expected in the calendar year. In Quebec the federal rates are 5%, 10%, 15% plus Quebec's 14%, 19%, 19%. For a non-resident of Canada it is 25% Part XIII tax unless a tax treaty lowers it. The rate is a prepayment; the real tax is set when you file.
How much of my retiring allowance can I transfer to my RRSP?
The eligible part is $2,000 for each year or part-year of service before 1996, plus $1,500 for each year before 1989 in which no employer pension or DPSP contributions were vested in you. It needs no RRSP room but must go to your own RRSP, not a spousal one. Anything above that is non-eligible and can be transferred directly only up to your unused RRSP deduction limit.
Where do I report a retiring allowance on my tax return?
Your employer reports it on your T4 under code 66 (eligible) and code 67 (non-eligible). Report both on line 13000 (other income). If part was transferred to your RRSP, deduct it on line 20800 and enter it on line 24640 of Schedule 7.
