The jacket came out of my locker in about ten seconds. Understanding the final payment took longer. Everyone called it my severance package, but the breakdown contained several kinds of money.
I was leaving at 54 after starting with the employer in 1992. Before choosing an RRSP transfer, I needed payroll to identify what each amount actually represented.
Separate the package into its tax categories
A retiring allowance can include compensation for loss of employment or a payment recognizing long service on or after retirement. It does not mean you must have reached retirement age. Salary continuance, wages instead of termination notice and unused vacation pay are not retiring allowances. Unused sick-leave credits paid on termination can be. The payment's nature matters more than the package's everyday name. CRA's payment categories.
Suppose my final package contains a $30,000 retiring allowance, plus $4,000 of unused vacation pay. I should not apply the retiring-allowance transfer calculation to the whole $34,000. The vacation amount retains its employment-income treatment.
I asked for the payment schedule, classification and expected T4 reporting in writing. If the figures or descriptions conflict, resolve that before relying on a transfer instruction.
Count the service years that actually qualify
The special eligible portion is limited to $2,000 for each year or part-year of service before 1996 with the employer or a related employer. There can be an additional $1,500 for each year or part-year before 1989 where the relevant employer pension or DPSP benefits were not vested or previously paid. Service since 1996 does not earn another $2,000 per year. Eligible-portion rules.
My example has four qualifying years, 1992 through 1995: 4 × $2,000 = $8,000. I had no pre-1989 service for the additional amount. The remaining $22,000 of my $30,000 allowance is the non-eligible portion.
Here, "non-eligible" means not eligible for that special service-based transfer. It does not mean tax-free, and it does not mean an ordinary RRSP contribution is impossible.
Keep the two RRSP routes separate
The $8,000 special portion can go to my own RRSP without using my normal deduction limit. It cannot use that special treatment in a spousal RRSP. A direct employer transfer of the eligible portion avoids withholding on that amount, and I still receive an RRSP receipt. Special transfer treatment.
The non-eligible portion can use ordinary available RRSP deduction room, including an eligible contribution to a spousal plan. If I have $6,000 of available room after accounting for other contributions, I could arrange $8,000 under the special route and $6,000 under the ordinary route. That would move $14,000 into RRSPs, leaving $16,000 of the allowance before withholding to be paid to me. Payroll needs adequate confirmation of the ordinary deduction room before making that portion's direct transfer without withholding. Employer transfer guidance.
The separate $4,000 vacation payment is outside that allowance example. I also need enough cash for the months ahead; a permitted transfer is a choice, not a requirement to lock away the whole payment.
Reconcile the tax slip and the contribution receipt
For the allowance in this example, T4 code 66 identifies the $8,000 eligible portion and code 67 the $22,000 non-eligible portion. The full retiring allowance is reported as income on line 13000. The qualifying RRSP contribution or transfer is claimed separately, rather than simply removing the transferred amount from income. Reporting the allowance and transfer.
A retiring allowance itself is not subject to CPP contributions or EI premiums, but income tax is generally withheld from the cash portion. That withholding is not necessarily the final tax. The complete return includes the other income, deductions and credits for the year. Payroll treatment.
I kept the service-date confirmation, payment breakdown, transfer instructions, T4 and RRSP receipts in one file. They explained the payment more clearly than the single word "severance" ever did.
Checked October 20, 2026. Canadian-resident example; pension transfers, non-resident payments and disputed settlements can require separate analysis.
