Jean-Pierre has worked for an advertising company in British Columbia since May 5, 1985. His employment was terminated on August 31, 2011, and he was paid a $47,000.00 retiring allowance. His company did not have a pension plan, a pension fund or a deferred profit sharing plan. Calculate the eligible portion of the retiring allowance based on Jean-Pierre's service.
Answer (1)
To determine the eligible portion of Jean-Pierre's retiring allowance for tax purposes, we use the following calculation for service before 1996:
Years of Service : First, calculate the total number of years Jean-Pierre worked for the company before 1996. He started on May 5, 1985, and the cutoff is December 31, 1995.
Start Date : May 5, 1985
End Date : December 31, 1995
To calculate, count the number of full years between these dates:
1985 to 1995 = 10 full years (from 1986 to 1995), excluding the partial year of 1985.
Eligible Amount for Service : For each year of service prior to 1996, $2,000 is eligible to be transferred to an RRSP (Registered Retirement Savings Plan) without affecting his RRSP contribution limit.
$2,000 per year for 10 years = $20,000
Eligibility for Service from 1985 Onwards : Since Jean-Pierre's employment commenced post-1984 and before 1996, contributions are eligible at $2,000 per year.
Therefore, the eligible portion of the retiring allowance that Jean-Pierre can roll into his RRSP is $20,000. This means he can defer tax on this amount by transferring it directly into his RRSP. The remaining amount of $27,000 ($47,000 total retiring allowance - $20,000 eligible portion) would be subject to regular income tax unless he chooses to contribute it to his RRSP using available contribution room.
