| 19(1) | 5-902484 |
| J. Stalker | |
| (613) 957-9796 |
October 22, 1990
19(1)
We are writing in response to your letter of September 11, 1990 concerning the tax treatment of your cash severance package.
Under paragraph 60(j.1) of the Income Tax Act (the "Act") you can transfer from your severance package (or "retiring allowance") $2,000 times the number of years during which you were employed by your employer (including part years) to a Registered Retirement Savings Plan ("RRSP") on a tax-free basis. Accordingly you can transfer $2,000 times 24(1) to an RRSP in respect of your years of employment. In addition you may also transfer $1,500 times the number of years of such employment before 1989 in respect of which your employer's contributions on your behalf under a pension plan have not vested at the time your severance package is received. For example if your employer contributed to its pension plan on your behalf during 1976 to 1990 and any payments made to 1988 have not vested, you may transfer an additional $1,500 for each unvested year to an RRSP.
Note that you must designate on your 1990 personal income tax return that you are transferring amounts to an RRSP by completing Form T2097 and attaching it to your return.
In answer to your question, there is no special rate of income tax on a cash severance payment. The cash payment will be taxed in the year received. Assuming that you receive the severance payment in 1990, the entire amount (excluding any allowable transfers to an RRSP) would be subject to tax at the relevant marginal rates (17% on approximately the first $28,000, 26% on approximately the next $28,000 and 29% on income above that, plus applicable provincial tax). To the extent that a portion of the payment is received after 1990, that portion will be subject to tax in than year.
We trust this is the information you require.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate