Losing a job — whether through retirement, restructuring, or termination — is stressful enough without having to decode the tax rules attached to your payout. If you've received or are expecting a retiring allowance, understanding how CRA treats that money can mean the difference between an unexpected tax bill and a well-managed transition. Here's what you need to know about retiring allowances in Canada, including how to use RRSP transfers to reduce your tax hit.
A retiring allowance (commonly called severance pay) is an amount you receive on or after retirement or on termination of employment, specifically in recognition of long service. CRA defines it under subsection 248(1) of the Income Tax Act, and the characterisation of the payment matters enormously for how it's taxed.
Retiring allowances include:
Retiring allowances do not include:
Getting the characterisation right is the first step. If your severance package bundles multiple types of payments together, working with a tax professional is worth the time before you file.
With a few exceptions, retiring allowances are fully taxable in the year you receive them. Your employer is required to withhold tax at source and remit it to CRA. The federal withholding rates are:
These are withholding rates, not your actual tax rate. They're a prepayment toward your year-end balance. If your marginal rate is higher than 30% — which is common in Alberta for amounts above roughly $111,000 — you'll owe the difference when you file. Conversely, if you're in a lower bracket for the year (say, because you only worked part of the year), you may receive a refund.
The practical takeaway: don't treat the withheld amount as your full tax obligation. Plan for your actual marginal rate.
This is one of the few genuine tax-planning opportunities still attached to retiring allowances, and it's increasingly rare. For years of service before 1996, CRA allows a tax-free rollover of up to $2,000 per full year of eligible service directly into your RRSP — regardless of your available RRSP contribution room.
The math is straightforward: if you worked for the same employer for eight full years prior to 1996, you can transfer up to $16,000 directly into your RRSP tax-free. That amount doesn't count against your regular RRSP room — it's entirely separate and additional.
A few important conditions apply:
Given that we're now 30 years past 1996, this provision applies to a shrinking group — typically workers in their late 50s or 60s who started with a long-term employer before 1996 and are now retiring. If that's your situation, don't overlook it. The tax savings can be substantial.
Even without pre-1996 service, you can reduce the tax on your retiring allowance by contributing to your RRSP using your available contribution room. This is a straightforward but timing-sensitive strategy.
Here's how it works: if you receive a $100,000 retiring allowance and have $50,000 of unused RRSP contribution room, you can contribute $50,000 to your RRSP in the same calendar year. Only $50,000 is then included in your net income for the year — the RRSP deduction offsets the rest. At a 48% combined federal-provincial rate (Alberta's top rate for 2025), that's potentially $24,000 in deferred tax.
Timing is critical. The RRSP contribution must be made in the same calendar year as the retiring allowance is received. You cannot wait until the following March 1 deadline and apply it retroactively. If your severance arrives in December, act before December 31.
Also confirm your exact RRSP room using your CRA My Account before contributing. Over-contributing triggers a penalty of 1% per month on the excess.
One aspect of retiring allowances that catches people off guard is the impact on Employment Insurance. When you receive a retiring allowance that includes pay in lieu of notice, CRA and Service Canada treat that amount as "earnings" that must be allocated to the weeks following your termination.
In practical terms: if you receive eight weeks' severance pay as compensation for lack of notice, your EI benefits cannot begin until that eight-week period has expired. The clock on your EI eligibility doesn't start until the allocated severance period runs out.
However, the rules can differ depending on how the payment is structured and characterised. A true retiring allowance paid in recognition of long service may be treated differently from a payment specifically described as wages in lieu of notice. Employers and legal counsel sometimes structure settlements with this distinction in mind — though CRA scrutinises the substance, not just the label.
If you have any ability to negotiate the timing of your severance — which is more likely in a negotiated departure than a mass layoff — consider requesting that payments be split across two calendar years. Because Canada's tax system uses progressive marginal rates, receiving $120,000 in one year will be taxed more heavily than receiving $60,000 in each of two consecutive years.
For context, Alberta's combined federal-provincial marginal rates for 2025 climb to 48% above approximately $355,845, and sit at roughly 40% between $111,733 and $173,205. Even a modest income-splitting arrangement can move a portion of your severance into a lower bracket and save thousands.
This strategy works best when negotiated before the severance agreement is signed. Once you've agreed to a lump sum, changing the payment schedule requires your employer's cooperation and a formal amendment.
At Swift Accounting Calgary, we routinely help clients model these scenarios before they finalise their exit negotiations — the analysis is straightforward, and the savings are often significant enough to justify the conversation.
Not all payments arising from employment termination are retiring allowances. Where a court awards — or a settlement provides — damages specifically for wrongful dismissal, breach of contract, or mental distress, CRA may treat those amounts as non-taxable.
The key principle is that damages intended to compensate for harm (rather than to replace employment income) may fall outside the definition of a retiring allowance entirely. For example:
This distinction can be worth tens of thousands of dollars, but it depends entirely on how the settlement agreement is drafted and characterised. CRA looks at substance over form — vague language that calls everything "damages" won't automatically make a payment tax-free. Employment lawyers experienced with tax consequences can structure settlements to reflect the true nature of each component. If you're in the middle of a wrongful dismissal claim, get that advice before signing.
Before your retiring allowance is paid, work through these steps:
The team at Swift Accounting can walk through each of these steps with you and run the numbers specific to your situation.
They're often used interchangeably, and for most purposes the tax treatment is the same. Technically, CRA uses the term "retiring allowance" to describe amounts received on or after retirement or termination in recognition of long service. Severance pay received in lieu of notice is generally included in this category, though the exact characterisation affects how EI treats the payment and whether any portion might be structured as non-taxable damages.
A direct tax-free transfer is only available for pre-1996 service ($2,000 per full year of service before 1996). For any retiring allowance amounts beyond that — or if you have no pre-1996 service — you can still use your available RRSP contribution room to shelter the income, but that's a deduction rather than an exclusion. The withholding tax still applies at source; you recover it when you file your return and claim the RRSP deduction.
Severance that compensates for lack of notice is treated as earnings for EI purposes and is allocated to weeks following your termination date. This delays the start of your EI benefits by the number of weeks the severance covers. A true retiring allowance in recognition of long service — as opposed to wages in lieu of notice — may not be subject to the same allocation rules, though Service Canada will look at the substance of the payment.
Employer withholding on a retiring allowance (10%, 20%, or 30% depending on the amount) is simply a prepayment of your eventual tax obligation. At year-end, you file your T1 return and the actual tax is calculated based on your total income and applicable marginal rates. If too much was withheld, you receive a refund. If too little was withheld — because your marginal rate exceeds the 30% withholding rate — you'll owe a balance. You can also request that your employer withhold additional tax at source if you anticipate a shortfall.
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