Special payments and the end of an employee s employment March 2017

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1 Special payments and the end of an employee s employment March 2017

2 Today s topics Termination of employment Wages in lieu of termination notice Retiring allowances Record of Employment 2

3 Termination of employment 3

4 Termination of employment An employee may stop working because of: retirement resignation layoff dismissal 4

5 Termination of employment In these situations, we recommend that the employer take the following actions: calculate the employee's earnings and deductions for the year, up to the termination date give the employee a T4 slip keep a copy of the T4 slip and include it with the T4 Summary when filing it on or before the last day of February of the following year 5

6 Dismissal of an employee When dismissing an employee, the employer generally has to: give the employee a termination notice, under the terms of an employment contract or federal, provincial or territorial employment labour standards 6

7 Wages in lieu of termination notice 7

8 Wages in lieu of termination notice The employer can pay an amount in lieu of a termination notice This amount is considered employment income The employer has to make the usual payroll deductions (CPP/QPP, EI and income tax) 8

9 Example He was dismissed by his employer Luke The employment contract says he has to be given three weeks termination notice They agreed that he would be paid three weeks wages Luke and his employer decided to end his employment immediately 9

10 Example Luke The amount paid to Luke is considered salary The employer should withhold usual payroll deductions from the payment The employer must include the amount of the payment in his employment income in box 14 of his T4 slip 10

11 Retiring allowances 11

12 Retiring allowances A retiring allowance is an amount paid to officers or employees: in recognition of long service when or after they retire OR when their office or employment is terminated even if the amount is for damages or following an order or judgment of a competent tribunal 12

13 Retiring allowances There must be a termination of employment or office Retirement, dismissal or termination occurs when the employment and its benefits end on a specific day Payments made when an employment is terminated are not all considered retiring allowances 13

14 Retiring allowances Include these two amounts in the retirement allowance: payments for unused sick leave credits on termination amounts individuals receive when their office or employment is terminated, even if the amount is for damages (wrongful dismissal when the employee does not return to work) 14

15 Retiring allowances Do not include the following six amounts: x x x accumulated vacation leave the employee did not take before retiring salary continuance payments representing loss of employee wages, salary or benefits if the employee continues to work or returns to work 15

16 Retiring allowances do not include - continued x x x wages in lieu of a termination notice damages for violations or alleged violations of an employee's human rights, awarded under human rights legislation, to the extent that these amounts are not taxable amounts for damages unrelated to the loss of employment 16

17 Loss of employment loss of employment may refer to elimination of an employment or loss of a source of income when an employee has been dismissed In respect of loss of an office or employment underlies a relation between the loss of employment and compensation for that loss 17

18 Is a payment for loss of employment a retiring allowance? The Courts brought up two questions: 1. Would the amount have been received without the loss of employment? 2. Was the purpose of the payment to compensate the individual for loss of employment? 18

19 Eligible payments with regard to a loss of employment Include: severance pay, lost wages, pension and employment benefits as long as employee is not reinstated general damages, payments for loss of self-respect, mental anguish, etc. 19

20 Transfer to a RRSP The eligible portion of a retiring allowance can be transferred directly to a RPP or a RRSP, tax free The annuitant must be the employee Does not affect RRSP contribution limits 20

21 Transfer to a RRSP The non-eligible portion can be transferred to a RRSP only if the employee still has contribution room left in their RRSP The annuitant can be the employee or the employee's spouse or common-law partner The employer cannot deduct tax on the amount if there is reasonable evidence that the employee has contribution room left in their RRSP 21

22 Payroll deductions x Do not deduct CPP/QPP contributions or EI premiums from retiring allowances Deduct income tax Note: For lump-sum payments, use the withholding tax rates in force on the payment date 22

23 Withholding tax rates Use the following lump-sum withholding rates to deduct income tax: 10% (5% for Quebec) on amounts up to and including $5,000 20% (10% for Quebec) on amounts over $5,000 and up to and including $15,000 30% (15% for Quebec) for amounts greater than $15,000 23

24 Withholding tax rates Combine the federal and provincial rates, except for the province of Quebec The rates indicated for Quebec represent only the federal portion 24

25 Example Braeden He is retiring and his employer pays him a retirement allowance of $40,000 in recognition of his long service as follows: June $20,000 September $10,000 December $10,000 What withholding tax rate should apply to each payment? Note: The province of Ontario is used in this example 25

26 Example Braeden His employer must combine all the lumpsum payments for the calendar year. Since the total amount in the year is over $15,000, a rate of 30% will apply to each of the three payments: June $20,000 x 30% $6,000 September $10,000 x 30% $3,000 December $10,000 x 30% $3,000 Total tax withheld on the retiring allowance: $12,000 26

27 Reporting a retiring allowance Report the retiring allowance on the T4 slip: 27

28 Reporting a retiring allowance In the Other information section at the bottom of the T4 slip, report: an eligible retiring allowance for a transfer into a RPP or a RRSP using code 66 a non-eligible retiring allowance using code 67 28

29 Reporting a retiring allowance Do not include the amount of the allowance in box 14 29

30 Record of Employment 30

31 Record of Employment Regardless of the reason for the termination of employment, the employer must prepare a Record of Employment (ROE) generally within five days following: the interruption of the employee's earnings the day the employer becomes aware of the interruption the date the employee stops working for the employer 31

32 Record of Employment Records of Employment are found: on the Service Canada website OR by calling their Employer Contact Centre at

33 Looking for more information? Visit us at cra.gc.ca Subscribe to our payroll electronic mailing list: cra.gc.ca/lists Listen to our payroll podcast: cra.gc.ca/socialmedia Watch our recorded webinars: cra.gc.ca/videogallery Follow us on 33

34 Publications: References T4001, Employers' Guide Payroll Deductions and Remittances T4130, Employers' Guide Taxable Benefits and Allowances RC4120, Employers' Guide Filing the T4 Slip and Summary Income Tax Folio, S2-F1-C2 Retiring Allowances 34

35 Questions? If you have questions, you can send them in now We will be back in five minutes to answer your questions For account-specific questions, please call