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Paying a retiring allowance in advance

Question: One of our employees plans to retire at the end of August and will receive a retiring allowance in recognition of her long service. She is in the midst of a financial crisis, so the company is paying her the retiring allowance in advance to help her meet her financial obligations. Since she will not be transferring any of it to a registered pension plan or registered retirement savings plan, do we use the lump-sum tax rates to calculate income tax deductions on the payment?

ANSWER: That payment is not a retiring allowance. To qualify as a retiring allowance, the payment must be made on or after retirement or as compensation for loss of office or employment. In this case, the employee will continue to work for the company after receiving the payment. As a result, the payment is employment income and must be taxed that way. You can use the bonus method to calculate the income tax deduction. The payment is also subject to Canada/Quebec Pension Plan (C/QPP) contributions and Employment Insurance (EI) and Quebec Parental Insurance Plan (QPIP) premiums.


Overpayments can become taxable benefits

Question: I am new to the company’s payroll department. I noticed in our records that three years ago, the previous payroll administrator accidentally overpaid an employee by $3,000 due to a clerical error. The records show the employee was notified of the error and promised to repay the overpayment, but he has not yet done that. Should I treat the overpayment as a taxable benefit at this point?

ANSWER: Yes, the Canada Revenue Agency states that if employers let employees pay back overpayments in installments or over a long period of time, they may have to calculate a taxable benefit for the overpayment. It would be an interest-free or low-interest loan taxable benefit. The taxable benefit would be subject to C/QPP contributions and income tax deductions, but not to employment insurance (EI) or QPIP premiums.

Applying for a reduced EI premium rate

Question: Our employer has recently set up a short-term disability
plan. I have heard that the federal government reduces EI premiums
for employers with these plans. How do we apply and how much
will our premiums be lowered?

ANSWER: Employers whose short-term disability plans meet specific criteria can apply to Service Canada for a reduced EI premium rate. The application form is available on Service Canada’s website at the plan must be either a weekly indemnity plan or a cumulative paid sick leave plan that:

•provides at least 15 weeks of benefits for employees

•provides at least the same level of benefits as EI

•has a waiting period of no more than 14 continuous days

•is the first payer (i.e., it cannot allow employees to claim EI benefits as part of its payments)

•allows employees to claim benefits within three months of being hired

•covers employees on a 24-hour basis.

You must also be able to show that the employer has a plan to return 5/12s of the EI premium savings to employees who are covered by the plan. The savings may be passed along as cash or in the form of new or improved benefits. Employers must do this in the year Service Canada gives them the reduced rate or in the first four months of the next year.

The employer must also include a copy of the short-term disability plan and any collective agreements that apply to employees covered by the plan. The employer should also submit a written agreement it has with the employees to return 5/12s of the reduction to them, if there is an agreement.

For more information on EI premium reductions, visit Service Canada’s website at www.servicecanada.gc.ca/eng/cs/prp/0200_000.shtml.