Maximum Eligible Amount for rollover to RRSP
Maximum Eligible Amount
 
You can transfer an amount of up to $2,000 per year of service with your employer from your start date to the end of 1995. Note that partial years count as full years. In addition, you can transfer up to $1,500 per year of service prior to 1989, where you were employed by the company but no contributions were made to a registered pension plan (RPP) or deferred profit sharing plan (DPSP) that are vested in you.
 
Therefore, you may be able to transfer up to $3,500 for each year of service prior to 1989 and $2,000 per year of service from 1989 to 1995 to your RRSP. If a portion of your retiring allowance is still not sheltered from taxes, then the after-tax cash received can be used to fund your unused regular RRSP contribution room from prior years if such room is available. If your employer agrees, this funding of unused regular RRSP room can be treated as an RRSP payroll contribution such that no withholding taxes on the transfer are required. The Income Tax Act has allowed individuals to carry forward any unused RRSP contribution room starting in 1991. This is known as your unused RRSP Deduction Room and is reported by Revenue Canada on your annual Notice of Assessment.
 
To find out the contribution room you may have, check your Notice of Assessment or simply call Revenue Canada.

 
Your RRSP investment will grow
faster with tax-free compounding.

Net invested from allowance of $10,000
 

 
Investing RRSP Funds

Investing options available to you in an RRSP include deposits, mutual funds or a self-directed account which may hold various types of securities, including stocks, bonds and foreign securities to a maximum of 20% of the book value of the total assets.(now 25%) 2001

3. Maybe you feel that you can't afford to transfer all of your allowance to an RRSP
 
Covering your living expenses yet maximizing tax deferral
 
You may require some of your retiring allowance to cover your living expenses until you find another job or to supplement any pension income you may be getting early. There are two ways you can go about doing this.
 
A. Take your cash cushion as lump sum now
 
Calculate the amount of cash that you will need and ask for it to be paid to you, with the remainder going to your RRSP. Note that you will have to take into account income taxes which will be withheld in determining the exact amount of cash you will need to ask for. For example, if you need $1,000 per month for say five months, then you will have to ask for a gross amount of $9,100 to be paid to you directly if you are subject to a 45% marginal tax rate. That is $9,100 less 45% or $4,095 = $5,005.
 
B. Withdraw cash from RRSP as needed
 
You can transfer the maximum eligible amount of your retiring allowance to your RRSP and withdraw lump sums of cash as required to supplement your cash needs. For example, if you transfer all of your allowance to an RRSP and then withdraw (say $1,000 per month) as required, you will shelter your allowance from immediate withholding tax but will have to pay a withholding tax on each occasion that you make a withdrawal from your RRSP account. In most cases, the rate of withholding tax is less than your marginal rate (see table). However, all amounts withdrawn from your RRSP will be treated as income when you file your Income Tax return the following year and you will then have to pay tax at your marginal rate.
 
 
Recommendation
 
Roll your retiring allowance or severance payment to an RRSP rather than have your required cash cushion paid to you directly. You can defer more tax by transferring funds to your RRSP and withdrawing cash as necessary (and it is usually desirable to pay tax later rather than sooner).
 
Besides, it is more likely that you will make your other dollars stretch to cover your expenses, and therefore preserve more of your retirement savings, because you have to consciously withdraw money from your RRSP every time you need it!
 
 

Vesting
 
Vesting is when contributions made by an employer to an RPP or DPSP on behalf of an employee belong to the employee. Vesting may be immediate or may not occur until you have completed a specified service requirement such as five years, or a plan membership requirement such as two years. Usually once pension assets are vested you cannot cash them for immediate use. Vesting rules are subject to provincial and legislative variations and to the specific details of your plan. You are advised to consult your pension department to determine the specific details as they pertain to you.
 
Withholding Tax Rates on RRSP Withdrawals
Withdrawal is Tax in
Quebec Tax in Other
Provinces
$1 to $5,000 21% 10%
$5,001 to $15,000 30% 20%
over $15,000 35% 30%
 
How to transfer your Retiring Allowance to an RRSP
 
1. You establish an RRSP account
 
You can transfer your entire retiring allowance or a part of it to any of a number of different types of RRSP accounts. For example: an RRSP deposit account at your bank or financial institution; an RRSP mutual fund account with any mutual fund company; or a self-directed RRSP account at a financial institution or mutual fund company. Or an RRSP at any Life Insurance Company selling segregated funds.
 
You have complete control over any investment decisions you make with respect to your retiring allowance. You can hold a variety of investment products in one or more RRSP accounts to which you transfer your money.
 
2. You complete a TD-2 form prescribed by Revenue Canada
 
Once you have identified the institution or company to which you would like your allowance transferred, you must complete a TD-2 Form which is prescribed by Revenue Canada for effecting such transfers. Your employer will provide you with this form. The form requires that you state the name and address and your RRSP account number at the institution or company to which you are transferring your allowance. The completion of this form is necessary to ensure that no taxes are withheld from the allowance before it is transferred to your RRSP.
 
3. If you sheltered a large sum, you may have to pay Alternative Minimum Tax
 
If you sheltered a large allowance, you may find that you are affected by the Alternative Minimum Tax (AMT) rule (see sidebar).
Alternative Minimum Tax (AMT)
 
The AMT was introduced to ensure that high-income, low-tax individuals, many of whom receive much of their income in tax-preferred ways, pay a calculated minimum amount of tax. In other words, there is a limit to the amount of tax shelters or preferences that you can claim in any one year. You are liable for AMT if the tax that you would owe under the AMT rules (which ignore certain tax shelters and preferences) exceeds the tax payable under normal rules. There is a $40,000 exemption in calculating your taxable income under AMT.
 
Quebec has reduced this exemption but excludes retiring allowance rollovers from its list of AMT tax preferences.

 
If you are liable for the AMT, you will have to complete Income Tax Form T691 Calculation of Minimum Tax when you file your tax return for the year. If you do owe AMT, you are granted a tax carry forward credit for the additional tax that you paid. This credit can be carried forward for up to seven years and used to reduce the normal tax payable in other years when you are not subject to AMT.
 
Recommendation
 
In the year in which you are leaving your job, the biggest adjustment which can have an impact on AMT might be the transfer of your retiring allowance to your RRSP. If you are departing late in the year, then you should consider having your retiring allowance paid out partially this year, with the balance paid next January. Seek the advice of a tax consultant if you think that you may be affected by AMT.
 
 
 
 

_______

1. Taking it all in Cash
 
You'll pay taxes at your top marginal rate
 
If you take your retiring allowance in cash then the entire amount will be taxed at your top marginal rate. Your marginal tax rate is the rate of tax that applies to the next dollar of income that you earn. The higher your income level, the higher the marginal tax rate that will apply to your retiring allowance.
 
Your company is required to withhold tax before making the payment to you. This withholding tax is at the same rates as apply to withdrawals from your RRSP.
 
Although these rates may be lower than your top marginal rate, you will have to pay the extra tax when you file your tax return for the year. In many instances, you may retain less than half of the total retiring allowance paid out after all taxes have been paid.
 
2. Investing your Allowance in an RRSP
 
You can defer paying taxes
 
Under the Income Tax Act, if you receive a retiring allowance you can make a special transfer of some or all of it to your RRSP without affecting your regular contribution limit. By so doing, you can reduce taxes depending on your specific circumstances (see side bar explaining the maximum eligible amount).
 
There are two main benefits of transferring your retiring allowance to an RRSP
 
1. You shelter the allowance from the taxes you would otherwise pay if you received the entire amount in cash.
 
2. If you transfer the money to an RRSP, your investment will grow on a tax-deferred basis and you will only pay taxes upon withdrawal from your RRSP. In most cases you may be subject to a lower tax rate once you have retired and start to draw the funds from your RRSP. The following chart shows these benefits. Assuming a $10,000 sum, a marginal tax rate of 45% (if you received the allowance in cash) and an annual return of 10% for 25 years, your money would be worth more than five times as much invested inside an RRSP. (Or three times after tax, assuming 35% taxes paid when funds are withdrawn.)
 
 
 
 

 
3. Maybe you feel that you can't afford to transfer all of your allowance to an RRSP
 
Covering your living expenses yet maximizing tax deferral
 
You may require some of your retiring allowance to cover your living expenses until you find another job or to supplement any pension income you may be getting early. There are two ways you can go about doing this.
 
A. Take your cash cushion as lump sum now
 
Calculate the amount of cash that you will need and ask for it to be paid to you, with the remainder going to your RRSP. Note that you will have to take into account income taxes which will be withheld in determining the exact amount of cash you will need to ask for. For example, if you need $1,000 per month for say five months, then you will have to ask for a gross amount of $9,100 to be paid to you directly if you are subject to a 45% marginal tax rate. That is $9,100 less 45% or $4,095 = $5,005.
 
B. Withdraw cash from RRSP as needed
 
You can transfer the maximum eligible amount of your retiring allowance to your RRSP and withdraw lump sums of cash as required to supplement your cash needs. For example, if you transfer all of your allowance to an RRSP and then withdraw (say $1,000 per month) as required, you will shelter your allowance from immediate withholding tax but will have to pay a withholding tax on each occasion that you make a withdrawal from your RRSP account. In most cases, the rate of withholding tax is less than your marginal rate (see table). However, all amounts withdrawn from your RRSP will be treated as income when you file your Income Tax return the following year and you will then have to pay tax at your marginal rate.