Taxes for unemployed clients, Part 1

Why read this?

• been laid off;
• quit; or
• been asked to retire.

What to do

1. Report income, including severance

Generally, CRA considers severance payments from an employer as taxable, says Andrew Pitre, partner at PDC Chartered Accountants in Kelowna, B.C. Employment income goes on Line 101 of the return.

TIP

Packages like severance or buyouts are treated as employment income.

2. Report retiring allowance transfers

If the allowance covers work prior to 1996, your client may move some or all of a retiring allowance into an RRSP, RPP, PRPP or SPP, tax-free (see “What’s a retiring allowance?”). Your client’s transfers may be listed on one or more of three CRA slips.

Calculating net income

To check if your client may have to repay EI benefits, take the amount reported on Line 234 and subtract the amounts reported on Lines 117 and 125. Then add any amounts deducted on Lines 213 and 232. If the total exceeds $63,500 in 2016, she’ll have to repay some of her EI benefit.

a If the allowance is reported on T4: Statement of Remuneration Paid, list the total of the amounts in Box 66 and Box 67 on Line 130 of the return.

b If the allowance is reported on T4A: Statement of Pension, Retirement, Annuity and Other Income, write the amount in Box 26 on Line 130 of the return (for 2009 and prior years only).

c If the allowance is reported on T3: Statement of Trust Income Allocations and Designations, write the amount in Box 26 on Line 130 of the return.

TIP

Transferring an eligible retirement allowance into an RRSP or RPP doesn’t affect your client’s deduction limit.However, transferring it to another retirement pension plan might.

For eligible amounts:

› Deduct the amount transferred into an RRP on Line 207 of the return.

› Deduct the amount transferred into an RRSP on Line 208 of the return.

› Report the amount of the transfer on Line 15 of Schedule 7: RRSP and PRPP Unused Contributions, Transfers and HBP or LLP Activities, and include it with the return.

For non-eligible amounts:

› Report the amount transferred into an RRSP on Lines 240 and 245 of Schedule 7.

› Report the amount transferred into an RRP on Line 2 or Line 3 of Schedule 7.

TIP

The clawback doesn’t apply if your client is receiving EI benefits for the first time in 10 years, or if she’s received maternity, parental, sickness or compassionate care benefits in the past.

3. Report employment insurance

› Report the amount from Box 14 of your client’s T4E: Statement of Employment Insurance Benefits, minus any money in Box 18, on Line 119 of the return.

› Your client will have to repay EI if, when reviewing her T4E:

» there’s an amount in Box 15,

» the rate in Box 7 is 30%, and

» your client has more than $63,500 in income (see “Calculating net income”).

› To repay, complete the chart on the T4E and report the total on Lines 235 and 422 of the return.

› Claim any EI your client already paid back directly to the employer on Line 232. The amount repaid would be listed in Box 30 of your client’s T4E.

What’s a retirement allowance?

It’s an amount your client received after quitting, retiring or losing her job. It may include pay for unused sick leave, damages from an employment tribunal or a package for being laid off. It does not include vacation leave or income from a retirement compensation agreement, superannuation or pension benefit, bonuses, overtime, salary, wages, legal fees, death benefits, counselling services, payments for unused vacation or wages in lieu of termination notice.

Source: CRA

Transferring a retirement allowance: What’s eligible?

Your client’s retiring allowance must be transferred into her own RPP, SPP, RRSP or PRPP to be tax-free. She can’t transfer the allowance into an RRSP if she’ll be 71 at the end of the tax year. Certain parts of the allowance are eligible for transfer without affecting her RRSP deduction limit. She may transfer:

› $2,000 per year or part-year of service before 1996 for the employer who is paying the allowance;

› an additional $1,500 for each part or full year of service before 1989 if she didn’t earn a pension or receive employer contributions to a deferred profit-sharing plan that have already vested.

The employer can directly transfer any ineligible part of the allowance into a registered account, up to the amount of the client’s RRSP room. Your client should get a contribution receipt from her employer. Transferring a retiring allowance to an RPP may create a pension adjustment affecting your client’s RRSP limit the following year.

Any legal fees incurred to organize the retirement allowance are deductible against the allowance. Report the costs on Line 232 of the return, and specify that the deduction is for legal fees in the adjacent space. However, she cannot deduct any legal awards or reimbursement for the fees.

The fees may be carried forward seven years and deducted against annual retirement allowance income. If your client has incurred legal fees, KPMG advises against transferring the entire allowance to an RRSP. Instead, keep enough in a taxable account to deduct the fees against.

Source: CRA; KPMG’s Tax Planning for You and Your Family, 2016