What counts and what does not
For payroll purposes, a retiring allowance is tied to the end of an office or employment: a payment at or after retirement, a reward for long service, or compensation for losing the job. According to the CRA, a payout of unused sick-leave credits on termination and a termination payment labelled as damages for wrongful dismissal can both qualify.
Several payments that often arrive with a termination are not retiring allowances. Salary, bonuses and overtime, accumulated vacation pay not taken before retirement, and wages in lieu of termination notice are treated as employment income instead. If one lump sum mixes wages in lieu of notice with damages, the wage portion is employment income and the damages portion is generally a retiring allowance. If the payment is a single amount with no breakdown, the CRA would generally treat all of it as a retiring allowance, so a clear written breakdown matters.
Withholding and slips
When you pay a retiring allowance directly to a resident employee, withhold income tax at a rate that depends on the total retiring allowances paid or expected to be paid in the calendar year: 10% up to $5,000, 20% from $5,001 to $15,000, and 30% above $15,000. These rates apply outside Quebec. Do not withhold CPP contributions or EI premiums.
Report the payment on a T4 slip. Code 66 is for eligible retiring allowances and code 67 for non-eligible ones. Withholding is only an estimate of the employee’s final tax, so the person may owe more or less when they file.
An illustrative example
Suppose a long-serving employee is paid a $20,000 retiring allowance directly, with nothing transferred to a registered plan. Because the year’s total is over $15,000, the 30% rate applies to the payment, so $6,000 is withheld and $14,000 is paid out. No CPP or EI is deducted. The $20,000 is included in the employee’s income for the year, and the withholding is credited when they file. The figures are illustrative only.
Employees with service before 1996 may be able to have part of the allowance transferred directly to an RPP or RRSP. The CRA’s formula allows $2,000 for each year or part year of service before 1996, plus $1,500 for each year or part year before 1989 in which the employer’s pension or DPSP contributions were not vested. Income tax is not withheld on the portion transferred. The employer reports the transferable part under code 66 and the rest under code 67.
What to discuss with your accountant
Before paying, confirm how each element of the package is classified, how it will be split across tax years if paid in instalments, and whether any amount is going to a registered plan. Keep the termination agreement, the calculation of years of service and the payment records with the payroll file.
Employees receiving a payment should ask how it affects their tax rate for the year, RRSP room and other benefits. Non-residents are treated differently and are not covered here.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
- When to remit payroll deductions and contributionsCanada Revenue Agency
- Payments of retiring allowancesCanada Revenue Agency
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.