Ask an Expert

QUESTION: We have employees retiring this year, and we will be paying out any unused, accumulated sick pay credits. How do we treat these monies?

ANSWER: A payment made on termination that represents accumulated sick pay credits qualifies as a retiring allowance and is subject to specific rules for tax treatment and year-end reporting.

A retiring allowance is not subject to Canada/Quebec Pension Plan (C/QPP) contributions, employment insurance (EI) premiums or Quebec Parental Insurance Plan (QPIP) premiums. Retiring allowances are taxable using lump-sum tax rates, provided that the employee is not transferring any amount directly to a registered pension fund or registered retirement savings plan (RRSP).

In addition, a certain amount of the retiring allowance may be transferred tax-free into a registered pension fund or RRSP in which the individual is the annuitant. This calculated amount is in addition to an individual’s personal RRSP deduction limit. The formula for calculating the amount eligible for transfer is set out in s. 60(j.1) of the federal Income Tax Act and is as follows:

$2,000 for each calendar year (or portion) before 1996 during which the employee was employed

$1,500 for each calendar year (or portion) before 1989 that the employee did not belong to a company pension plan, pension fund or deferred profit-sharing plan, or belonged to a plan, but the employer’s portion was not vested in the employee when the employer paid the retiring allowance. The $1,500 amount can be prorated according to the percentage of vesting.

Employees may transfer the non-eligible portion of a retiring allowance to an RRSP if they verify they will not exceed their personal RRSP deduction limit. The onus is on individuals to ensure they will not exceed this limit.

A letter of authority from the CRA is not required. This does not change non-eligible amounts to eligible amounts.

At the end of the year, the eligible amount of the retiring allowance is reported on the T4 in the "Other Information" area using code 66 and the non-eligible amount is reported using code 67. Do not include the retiring allowance in box 14 on the T4.

For Quebec, the entire amount of the retiring allowance is reported in box O of the RL-1. Enter code RJ in the code box (case O).

Deductions on wages from deferred salary

QUESTION: We have set up a salary deferral plan for an employee that allows him to defer receiving part of his salary to fund a leave he will be taking in three years. Do I take source deductions from the deferred portion of his salary now or wait until he receives the money during the leave?

ANSWER: For a regular salary deferral plan (meaning not a prescribed plan — see the next question for information on prescribed plans), the deferred salary is considered employment income in the year the employee earns it. Deduct C/QPP, EI, QPIP and income tax in the usual way.

If the plan is a prescribed plan under the federal Income Tax Act (and Quebec Taxation Act, if applicable), different rules apply. The deferred amounts are considered income in the year the employee receives them. As a result, you have to treat source deductions differently:

Deduct C/QPP and income tax from the employee’s net salary (meaning the employee’s earnings minus the deferred amounts) while the employee is working and from the deferred amounts when you pay them to the employee during the leave.

Employers must also deduct income tax from any interest income and other amounts on the deferred salary.

For EI and QPIP premiums under a prescribed plan, make deductions from the employee’s gross salary (meaning the employee’s earnings including the deferred amounts) while the employee is working, up to the annual maximum.

Do not take any EI or QPIP deductions when paying the deferred amounts to the employee during the leave.


Determining province/territory of employment

QUESTION: Our office is located in Saskatchewan. We have recently expanded and are hiring employees to work in British Columbia, Alberta and Manitoba. They will work from home offices and be paid from Saskatchewan. For payroll deductions, how do we determine their province of employment?

ANSWER: When an employer does not require employees to report for work at its place of business, the employee’s province or territory of employment will be the province or territory from where the employer pays the employee. (This is usually the place where the payroll department or payroll records are located.) In this situation, the province/territory of employment will be Saskatchewan.

The Canada Revenue Agency (CRA) advises that employees who live in one province or territory, but work in another may be subject to excessive tax deductions. They may contact a CRA tax services office to obtain a letter of authority to reduce their income tax deductions. Alternatively, the employees may not have enough tax deducted. In this situation, the CRA advises they should request that their employer take additional tax deductions at source.