Annie Chong, manager of Carswell’s payroll consulting group, fields questions from readers
QUESTION: We are paying retiring allowances to some retiring employees in recognition of their long service. These individuals will continue to be part of the company benefits plan for a period of time after they retire. Does this disqualify the payments as retiring allowances?
ANSWER: Not necessarily. The Canada Revenue Agency’s interpretation bulletin on retiring allowances (IT-337R4) states an individual’s continued participation in a health plan (medical, dental, long-term disability) for a restricted time period would not disqualify the payment as a retiring allowance, especially if the employer’s health plan allows former employees to be covered. The term “restricted” is not defined.
If an individual is allowed to continue to accrue pension credits, it would indicate an employment relationship still exists and payments in recognition of long service would not qualify as a retiring allowance. A retiring allowance is an amount paid when or after employees retire from an office or employment in recognition of long service or for the loss of office or employment.
Source deductions and banked overtime
QUESTION: We are paying out banked overtime in a lump sum payment to some employees. How do we calculate the source deductions to take?
ANSWER: Overtime pay is subject to source deductions for Canadian Pension Plan (CPP) or Quebec Pension Plan (QPP), employment insurance (EI), Quebec Parental Insurance Plan (QPIP) and income tax.
When overtime pay is paid in a later pay period than the one in which it was earned, the CPP or QPP contributions are calculated by multiplying the payment by the current percentage rate (4.95 per cent for 2011) provided the employee has not reached the maximum CPP or QPP contribution for the year ($2,217.60 for 2011). For EI and QPIP, multiply the payment by the current premium percentage rates for EI (1.78 per cent for employees outside Quebec and 1.41 per cent for employees in Quebec) and for QPIP (0.537 per cent), provided the employee has not reached the annual maximum premium.
The maximum employee premium for 2011 is $786.76 for employees outside Quebec and $623.22 for employees in Quebec. The maximum employee premium for the QPIP for 2011 is $343.68.
Transferring banked overtime payments to a RRSP
QUESTION: We are paying out banked overtime to an employee in one lump sum payment. The employee has asked us to transfer the money directly to her registered retirement savings plan (RRSP). Do we deduct income tax before making the transfer and, if so, do we use the lump sum tax rates?
ANSWER: The income tax does not need to be deducted from the portion of the lump sum payment for banked overtime being transferred to the employee’s RRSP as long as the amount transferred is not higher than the employee’s RRSP deduction limit — this would also apply for a transfer to a registered pension plan (RPP). The tax-exemption also applies to the following types of lump sum payments transferred to an RRSP or RPP, provided the amount transferred does not exceed the employee’s deduction room:
•bonuses
•death benefits
•deferred profit-sharing plan payments
•employee profit-sharing plan payments
•the excess amount from a registered retirement income fund
•income-averaging annuity contracts
•retroactive payments, such as lump-sum vacation, sick-leave credits, non-eligible part of a retiring allowance
•superannuation or pension plans.
Before making the transfer, there must be reasonable grounds to believe the employee has deduction room in her RRSP.
This can be done by asking the employee to confirm the contribution can be deducted for the year or the employee can provide a copy of her RRSP deduction limit statement the Canada Revenue Agency sends with each individual’s Notice of Assessment.
If only a portion of the lump sum payment is being transferred to an RRSP (or RPP) and the rest is being paid directly to the employee, income tax must be deducted using the bonus method.
The lump sum tax rates are used only for certain types of payments, such as retiring allowances, the taxable part of a death benefit, proceeds from a profit-sharing or deferred profit-sharing plan and pension plan refunds.
Annie Chong is manager of the payroll consulting group at Carswell, a Thomson Reuters business, which publishes the Canadian Payroll Manual and operates the Carswell Payroll Hotline. She can be reached at [email protected] or (416) 298-5085.
