A retiring allowance is an amount paid to an employee on or after retirement in recognition of long service, or in respect of the loss of an office or employment — and under ITA s. 248(1) it is fully taxable, with only a narrow, formula-limited portion eligible for a tax-deferred rollover into an RRSP or pension plan.
The definition in ITA s. 248(1) covers an amount received “(a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer’s long service, or (b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal,” excluding a superannuation or pension benefit. It is brought into income under s. 56(1)(a)(ii) in the year received.
The one relief valve is the transfer rule in ITA s. 60(j.1), which lets the recipient deduct — and shelter in an RRSP or registered pension plan, outside their normal contribution room — “$2,000 multiplied by the number of years before 1996” the employee worked for that employer, plus “$1,500 multiplied by” the number of pre-1989 years not already covered by vested employer pension or profit-sharing contributions. Everything above that formula amount is ordinary, fully taxed income with no LCGE relief available — a retiring allowance is compensation for service or termination, not proceeds from a share sale, so the tests in the qualified small business corporation share definition never come into play.
A founder-CEO steps down at closing after being employed by the target from 1990 to 2026 — six of those years fall before 1996, none before 1989. The company pays a $150,000 retiring allowance on departure. Under s. 60(j.1), the eligible amount is $2,000 × 6 years = $12,000, which the founder can contribute to an RRSP without using up regular deduction room. The remaining $138,000 is fully taxable in the year received. On the buy side, if the payment is a one-time closing cost rather than an ongoing compensation obligation, it is also a natural line item for the add-back schedule used to normalize the target’s earnings before applying a valuation multiple.
See also: Add-back · Rollover equity · Share purchase agreement.
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