Retiring allowances and benefits plans

Annie Chong, manager of Carswell’s payroll consulting group, fields questions from readers
|Canadian Payroll Reporter|Last Updated: 03/02/2011

QUESTION: We are paying retiring allowances to some retiring employees in recognition of their long service. These individuals will continue to be part of the company benefits plan for a period of time after they retire. Does this disqualify the payments as retiring allowances?

ANSWER: Not necessarily. The Canada Revenue Agency’s interpretation bulletin on retiring allowances (IT-337R4) states an individual’s continued participation in a health plan (medical, dental, long-term disability) for a restricted time period would not disqualify the payment as a retiring allowance, especially if the employer’s health plan allows former employees to be covered. The term “restricted” is not defined.

If an individual is allowed to continue to accrue pension credits, it would indicate an employment relationship still exists and payments in recognition of long service would not qualify as a retiring allowance. A retiring allowance is an amount paid when or after employees retire from an office or employment in recognition of long service or for the loss of office or employment.

Source deductions and banked overtime

QUESTION: We are paying out banked overtime in a lump sum payment to some employees. How do we calculate the source deductions to take?

ANSWER: Overtime pay is subject to source deductions for Canadian Pension Plan (CPP) or Quebec Pension Plan (QPP), employment insurance (EI), Quebec Parental Insurance Plan (QPIP) and income tax.

When overtime pay is paid in a later pay period than the one in which it was earned, the CPP or QPP contributions are calculated by multiplying the payment by the current percentage rate (4.95 per cent for 2011) provided the employee has not reached the maximum CPP or QPP contribution for the year ($2,217.60 for 2011). For EI and QPIP, multiply the payment by the current premium percentage rates for EI (1.78 per cent for employees outside Quebec and 1.41 per cent for employees in Quebec) and for QPIP (0.537 per cent), provided the employee has not reached the annual maximum premium.

The maximum employee premium for 2011 is $786.76 for employees outside Quebec and $623.22 for employees in Quebec. The maximum employee premium for the QPIP for 2011 is $343.68.