A retiring allowance in Ontario is taxed in two stages. Your employer withholds federal and provincial income tax at a flat rate of 10%, 20%, or 30% depending on the size of the payment, and then your actual tax bill is settled when you file, based on your total income for the year. The withholding is only a down payment. Depending on your other income and whether you shelter any of the money in an RRSP or RPP, you may owe more at filing time or get some back.
Withholding Rates on the Payment
When your employer pays a retiring allowance to you in cash, the Canada Revenue Agency’s lump-sum withholding rates apply. Ontario uses the same tiers as every province outside Quebec:1Canada.ca. Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary
- Up to $5,000: 10% withheld
- $5,001 to $15,000: 20% withheld
- Over $15,000: 30% withheld
The rate is flat and applies to the full gross amount, not just the slice above each threshold. A $16,000 payment sits in the top tier, so $4,800 goes to the CRA before you see a dollar. A $14,000 payment sits in the middle tier, and $2,800 is withheld. Your employer looks at all retiring allowance payments made or expected in the same calendar year to decide which tier applies.
One point to check on your pay stub: retiring allowances are not subject to Canada Pension Plan contributions or Employment Insurance premiums. Neither should be deducted.2Canada Revenue Agency. Retiring Allowances If you see CPP or EI coming off a retiring allowance line, raise it with payroll before your T4 is issued.
What You’ll Actually Owe
The withholding rate and your real tax rate are rarely the same number. The retiring allowance gets added to your other income for the year, and the combined total determines your marginal rate. Federal and Ontario rates stack like this for 2026:
- First ~$53,891: 5.05% Ontario + 14.00% federal = roughly 19.05% combined
- $53,891 to ~$58,523: 9.15% + 14.00% = roughly 23.15%
- $58,524 to ~$107,785: 9.15% + 20.50% = roughly 29.65%
- $107,786 to ~$117,045: 11.16% + 20.50% = roughly 31.66%
- $117,046 to ~$150,000: 11.16% + 26.00% = roughly 37.16%
- $150,001 to ~$181,440: 12.16% + 26.00% = roughly 38.16%
- $220,001 to ~$258,482: 13.16% + 29.00% = roughly 42.16%
- Over $258,482: up to 20.53% Ontario (after surtax) + 33.00% federal = roughly 53.53%
Ontario also adds a surtax when provincial tax exceeds $5,818 (20% surtax) and again when it exceeds $7,446 (an additional 36%), which pushes the top Ontario rate from 13.16% to 20.53%. In practice, someone earning $90,000 in salary who receives a $60,000 retiring allowance now has $150,000 in total income, and the top slice of that payment is taxed at a combined marginal rate above 37%. The 30% withheld at source will not cover the full bill, and the shortfall shows up as a balance owing at tax time.
The reverse can also happen. If the retiring allowance arrives in a year when your other income is low, the 30% withheld may be more than you actually owe, and you get the difference back as a refund.
What Counts as a Retiring Allowance
Under the Income Tax Act, a retiring allowance is money you receive either in recognition of long service or because you lost your job. The second category covers severance packages, wrongful dismissal settlements, and amounts paid under a court order or tribunal judgment related to your termination.3Canada.ca. Income Tax Folio S2-F1-C2, Retiring Allowances Payouts for unused sick leave credits on termination also qualify.2Canada Revenue Agency. Retiring Allowances
Several termination-related payments do not qualify, and they are taxed as regular employment income instead. Accumulated vacation pay is ordinary income because you earned it while working. Wages paid in lieu of notice are ordinary salary. Amounts paid to a dependant or estate after an employee’s death are generally handled as death benefits under separate rules, though in some circumstances they can keep their retiring allowance character.3Canada.ca. Income Tax Folio S2-F1-C2, Retiring Allowances The classification matters because it decides which withholding schedule applies and whether you can shelter any of the money.
Transferring to an RRSP or RPP to Defer the Tax
A direct transfer is the most tax-efficient way to handle a retiring allowance if you have the room. When your employer sends the money straight to your RRSP, RPP, pooled registered pension plan, or specified pension plan, no withholding tax is deducted on the transferred amount.4Canada.ca. Transfer of a Retiring Allowance The full gross amount lands in the registered account and starts growing tax-sheltered right away.
To arrange it, you give your employer a written statement confirming that the transfer amount fits within your available RRSP deduction limit (for the non-eligible portion) or identifying the eligible portion based on your pre-1996 service. No special CRA form is required, and your employer does not need a letter of authority to reduce the withholding.4Canada.ca. Transfer of a Retiring Allowance Check your most recent Notice of Assessment for your current RRSP deduction limit before you sign that statement, because overstating your room creates an excess contribution that triggers its own penalty.
The Eligible Portion: Years of Service Before 1996
If you have years of service with the employer before 1996, part of your retiring allowance qualifies for a special RRSP or RPP transfer that does not use up your regular contribution room. The CRA calls this the eligible portion:5Canada Revenue Agency. Retiring Allowance
- $2,000 for each full or partial year of service before 1996
- An additional $1,500 for each full or partial year of service before 1989 where no employer contributions to a pension plan or deferred profit sharing plan had vested
Someone who worked for the same employer from 1984 through 2024, with no vested pension contributions before 1989, could shelter up to $2,000 × 12 pre-1996 years ($24,000) plus $1,500 × 5 pre-1989 years ($7,500), for an eligible portion of $31,500. That full amount can go directly into an RRSP or RPP without touching regular deduction room.6Canada Revenue Agency. Transferring the Eligible Part of a Retiring Allowance
The Non-Eligible Portion
Years of service after 1995 produce the non-eligible portion. You can still transfer it to your RRSP, but only if you have enough regular RRSP deduction room, and the transfer uses that room just like any other contribution.7Canada Revenue Agency. Transferring the Non-Eligible Part of a Retiring Allowance You can also split the payment: transfer what you can and take the rest in cash, with the cash portion subject to the usual withholding tier.
Spreading Payments Across Tax Years
If your employer agrees, you can take the retiring allowance in instalments spread over two or more calendar years rather than as a single lump sum. Each instalment is taxed in the year you actually receive it.3Canada.ca. Income Tax Folio S2-F1-C2, Retiring Allowances The choice has to be made on or before the employment ends. You cannot restructure a lump sum after it is already paid.
Spreading payments can keep each year’s total income in a lower marginal bracket. Someone leaving a $120,000 job in November with a $60,000 retiring allowance faces a much higher marginal rate taking it all in the same year compared with splitting $30,000 into December and $30,000 into January, especially if the following year brings less employment income. The trade-off is that you are relying on the employer to make a future payment, so weigh the employer’s financial stability before agreeing to defer.
Reporting It on Your Tax Return
Your employer reports the retiring allowance on your T4 slip. The eligible portion appears in box 66 and the non-eligible portion in box 67.8Canada Revenue Agency. T4 Slip – Statement of Remuneration Paid On your T1 return, both amounts go on line 13000 (Other Income).9Canada Revenue Agency. Line 13000 – Other Income
If you transferred the non-eligible portion to your RRSP, claim that deduction on line 20800. The eligible portion transferred to an RRSP or RPP is handled separately and does not reduce your RRSP deduction limit.7Canada Revenue Agency. Transferring the Non-Eligible Part of a Retiring Allowance The tax already withheld by your employer applies as a credit against your total tax for the year. If the withholding exceeded what you owe, the difference comes back as a refund; if your total income pushed you higher, you pay the balance.
Double-check that your T4 separates box 66 and box 67 correctly, especially if your employer handled both a direct RRSP transfer and a cash payment. Errors here are easier to fix with payroll before the slip is filed than through a T1 adjustment afterward.