About Pay in-Lieu of Notice, Retiring Allowance or Salary Continuance

When an employee is paid an amount in lieu of termination notice under the terms of an employment contract or federal, provincial, or territorial employment standards, the amount is considered employment income, whether or not it is paid on termination of the employment. Also known as termination pay, the calculation of the number of weeks of notice that must be given, or paid, is based on the number of years the employee has worked for the company. Provincial legislation generally dictates the minimum notice or pay that must be given. To view specific information for each province, click here.

Deduct CPP contributions, but not QPP, EI/QPIP premiums, and income tax. To determine the amounts to deduct, include the wages in lieu of termination notice with the regular income, if any, for the pay period.

Per CRA, use the bonus method to determine the tax to deduct from the wages in lieu of termination notice.

A retiring allowance (also called severance pay) is an amount paid to officers or employees when or after they retire from an office or employment in recognition of long service or for the loss of office or employment.

A retiring allowance includes:

  • payments for unused sick leave credits on termination; and
  • amounts individuals receive when their office or employment is terminated, even if the amount is for damages (wrongful dismissal).
  • indemnity in lieu of notice (Quebec only)

A retiring allowance does not include:

  • a superannuation or pension benefit
  • an amount an individual receives as a result of an employee's death
  • a benefit derived from certain counselling services
  • payments for accumulated vacation leave not taken prior to retirement
  • pay in lieu of termination notice (except in Quebec)
  • damages for violations or alleged violations of an employee's human rights awarded under human rights legislation (these damages are not taxable)
  • Salary continuance

Deduct income tax from any part paid directly to the recipient using the Lump Sum tax rates. Do not deduct CPP and EI premiums from retiring allowances. Retiring Allowances are reported on a T4 in Box 66 for the Eligible portion and in Box 67 for the Non-eligible amount. For Quebec employees, enter the amount on a Relevé 1 slip in Box 0 using code RJ.

The amount that is Eligible is:

  • $2,000 for each year or part of a year before 1996 that the retiree worked for you (or a person related to you); plus
  • $1,500 for each year or part of a year before 1989 of that employment in which none of your contributions to the RPP or DPSP were vested in the employee's name when you paid the retiring allowance. Determine the equivalent number of years of vesting by referring to the terms of the particular plan. The number can be a fraction.

Non-Eligible Retiring Allowances can be allocated to an RRSP; however, the contribution amount is governed by the cap on their RRSP deduction limit.

Note:

For your convenience: Current and authoritative material are available on the CRA site at the following links:

If upon termination, an individual received periodic payments and remains entitled to benefits available only to employees, for example, long-term disability or if the individual continues to accrue pensionable service or continuation in the group RRSP plan, the payments are considered a salary continuance.

Deduct all regular statutory withholdings, including CPP/QPP, EI/QPIP and Tax. These payments are reported on a T4 in Box 14 a Relevé 1 in Box A. The calculation of vacation pay can vary. Review all other code set up information and specific provincial requirements. ROE's should be issued only at the end of the Salary Continuance period.

Important: Salary Continuance set-ups may vary as they are a negotiated agreement between the employee and employer. For this reason, we suggest the customer contact the Provincial Labour Standards office to ensure their set-up is correct.