CD 2012-010

Subject: New Entitlement Codes - Status Indian Severance Pay

August 16, 2012

1. Purpose

1.1. The purpose of this directive is to provide information on the new entitlement codes for the payment of severance pay to Status Indian employees in accordance with the Canada Revenue Agency (CRA) policy.

1.2. This directive should be read in conjunction with ARCHIVED CD 2009-028, dated December 1, 2009.

2. Background

2.1. Currently, severance pay payments for Status Indian employees are processed with entitlement codes 054 (severance pay - eligible) and 280 (severance pay – non eligible) which are used for most employees. However, payments processed with these entitlement codes are subject to income tax at source. For this reason, client departments have to provide letters to their Status Indian employees indicating the Status Indian exempt income portion of the severance pay. In turn, Status Indian employees have to provide this letter to the CRA and Revenu Quebec (if applicable) with their tax return.

3. Policy

3.1. Where a Status Indian employee's employment income was exempt from income tax, any severance pay paid as a result of that period of employment will be exempt from income tax. If only a portion of the employment income was exempt, then the same portion of the severance pay payment will be exempt from income tax.

3.2. Severance pay payments made to Status Indian employees must be reported on the T4 (Statement of remuneration paid) tax slip, in the "Other information" area, in boxes 68 (Status Indian (exempt income) – Eligible retiring allowances) and 69 (Status Indian (exempt income) – Non-eligible retiring allowances) and on the Relevé 1 (Employment Income and Miscellaneous Income) tax slip in box O (Other Income) with code RJ (Retiring Allowance) and box R (Revenue earned on a reserve).

4. Procedures and Instructions

4.1. Two new entitlement codes have been created in the Regional Pay System (RPS) to process the tax exempt severance pay for a Status Indian employee:

  • 1S1 Indian Status – Eligible Severance Pay
  • 1S2 Indian Status – Non-Eligible Severance Pay

4.2. Severance pay transactions processed with entitlement codes 1S1 and 1S2 will not be subject to any income tax at source and should be processed with a Termination Entitlements (TEC) (Personnel-Pay Input Manual (PPIM) 14-6-7 or PPIM 4-4-71-1) transaction.

4.3. The calculation of the eligible portion of the tax exempt severance pay for a Status Indian employee is the same calculation as for all employees. For instructions on the calculation of the eligible portion, please refer to ARCHIVED CD 2006-002 Annex A. Where a Status Indian employee wishes to transfer the eligible portion of the severance pay to a registered retirement savings plan (RRSP), clients should process a Termination Deductions (TED) (PPIM 14-5-6 or PPIM 4-4-77) transaction with deduction code 582 - (Transfer to RRSP) in order to have the proviso "for deposit to an RRSP account only" appear on the payment.

4.4. Two new Master Employee Record (MER) elements have been created to record severance pay payments made to Status Indian employees using entitlement codes 1S1 and 1S2. Payments made with code 1S1 will accumulate in element 769 (Indian Severance Pay) and be reported in box 68 (Status Indian (exempt income) – Eligible retiring allowances) in the "Other information" area of the T4 slip. Payments made with code 1S2 will accumulate in element 770 (Indian Severance Pay Non-Transferable) and be reported in box 69 (Status Indian (exempt income) – Non-eligible retiring allowances) in the "Other information" area of the T4 slip. Amounts accumulated in elements 769 and 770 will be reported on the Relevé 1 tax slip in box O (Other Income) with code RJ (Retiring Allowance), as well as in box R (Revenue earned on a reserve).

It should be noted that the reporting of any amounts accumulated in elements 769 and 770 will only be in effect starting with the 2012 T4/Relevé 1 tax slips.

4.5. Where a portion of the severance pay is taxable and the employee is currently showing as a Status Indian employee in RPS (i.e. field 42 = 0), client departments must process the taxable severance pay through the RPS (via a TEC screen or Pay Action Code (PAC) 71) with entitlement codes 054 (severance pay - eligible) and 280 (severance pay – non eligible) in order to have income tax deducted at source. Code 395 "Tax Exemption Supplementary - Federal" and code 396 "Tax Exemption supplementary - Québec" should be utilized to waive the income tax on the taxable portion of the eligible severance pay that is transferred to an RRSP as well as a Termination Deductions (TED) (PPIM 14-5-6 or PPIM 4-4-77) transaction with deduction code 582 (Transfer to RRSP) in order to have the proviso "for deposit to an RRSP account only" appear on the payment.

4.6. Client departments that have processed payments in 2012 for Status Indian tax exempt severance pay using entitlement codes 054 and 280, should provide the pay office (PO) with the account information, the eligible portion amount and the non eligible portion amount. In turn, the PO will make the necessary adjustments to the employee's MER to ensure that these amounts are reported correctly on the 2012 T4 and Relevé 1 tax slips.

5. Pay Office Instructions

5.1. It should be noted that payments made with entitlement code 1S1 will accumulate in MER elements 725 and 769, and those made with code 1S2 will accumulate in MER elements 728 and 770. For technical requirements in the production of T4 and Relevé 1 tax slips, elements 725 and 728 are automatically adjusted when elements 769 and 770 are credited or debited. Therefore, if a manual adjustment (PAC 30) is required to element 769 and/or element 770, the system will automatically generate a corresponding PAC 30 transaction to update element 725 and/or element 728.

5.2. Where a manual T4 slip is required, the amount in MER element 769 must be reported in box 68 (Status Indian (exempt income) – Eligible retiring allowances) in the "Other information" area of the T4 slip, and the amount in element 770 must be reported in box 69 (Status Indian (exempt income) – Non-eligible retiring allowances) in the "Other information" area of the T4 slip. For Québec residents, amounts accumulated in MER elements 769 and 770 must be reported on the Relevé 1 tax slip in box O (Other Income) with code RJ (Retiring Allowance), as well as in box R (Revenue earned on a reserve).

This will only be required starting with the 2012 taxation year T4/Relevé 1 reporting.

5.3. Upon request from a client department, any payment made in 2012 with entitlement codes 054 and 280, which represent Status Indian tax exempt severance pay, will require an adjustment to the employee's MER. Any such amount paid with code 054 (eligible) will need to first be debited from element M725, then be credited to element M769, and those made with code 280 (non eligible) will need to first be debited from element M728, then be credited to element M770. The PAC 30 transactions to credit element M769 and M770 will automatically credit elements M725 and M728.

6. Personnel-Pay Input Manual (PPIM)

6.1. The PPIM will be updated to incorporate the changes included in this compensation directive.

7. Inquiries

7.1. Any inquiries on the information contained in this document should be addressed to your Public Works and Government Services Canada (PWGSC) Compensation Services Office.

Original Signed by
Carrie E. Roussin

Carrie E. Roussin
Director General
Compensation Sector
Accounting, Banking and Compensation

Reference(s): Entitlement Codes 1S1 and 1S2