Overview: A retiring allowance ( also called Severance Pay), is an amount paid to officers or employees when or after they retire from an office or employment, in recognition of long service or for the loose of office or employment. It is recorded on the T4 in Box 14 and 66.

Retiring Allowance must be taxed even if the recipient’s total earnings received or receivable during the calendar year, including the lump-sum payment, or less than the total amount claimed on his or her TD1, Personal Tax Credits Return.

The lump sum tax method is used to determine the withholding amounts for the Severance Payment.

Step 1: Create Severance in Deduction, Reimbursements and Other Earnings

Severance Setup

Sample Setup:

  • Code = SEV
  • Description = Severance
  • Type = Custom
  • Category = Other Payment
  • Information Return = T4
  • T4 Other Information Code = 66

Step 2: Lump Sum Tax Method

If the employee is getting only the Severance paid, check the Canada Revenue agency site to determine the Lump Sum Tax Method rate that is applicable for the amount that is being paid.

Ensure that the employee’s normal pay has been deleted from the Employee Card, so that when you “Calculate Gross”, the amount does not get brought into the Payroll Worksheet.

Pay Details

Step 3: Payroll Worksheet

Enter the amount of the Severance Pay to the Employee using the Deductions Icon on the Payroll Worksheet.

Deductions Icon

Enter the Code that has been created for the Severance Pay, and show the “Category” as Other payment, then close.

Severance Payment

Continue with the Payroll Process of Get Hours, Check for Issues, Calculate Gross and Calculate Taxes.

Since the regular Salary has been deleted from the Employee Card, the following warning is created. Click OK and carry on with the Payroll Process.

Warning Message

To enter the Lump Sum Tax amount, click on the link for Total Deductions and enter the amount that has been calculated.

Enter Lump Sum Tax

Continue with “Transfer to Journals” and the following Warning appears. Click OK

Calculate Gross Warning

The following Earnings Statement shows that the employee has been paid a severance with the appropriate deductions made.

Earnings Statement