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
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.
Step 3: Payroll Worksheet
Enter the amount of the Severance Pay to the Employee using the Deductions Icon on the Payroll Worksheet.
Enter the Code that has been created for the Severance Pay, and show the “Category” as Other payment, then close.
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.
To enter the Lump Sum Tax amount, click on the link for Total Deductions and enter the amount that has been calculated.
Continue with “Transfer to Journals” and the following Warning appears. Click OK
The following Earnings Statement shows that the employee has been paid a severance with the appropriate deductions made.
