I have been told that you are allowed a one-time rollover of severance pay into an RRSP, regardless of whether you have the contribution room in your RRSP. Is this correct?
Severance pay in recognition of years of service may be considered a retiring allowance for tax purposes. If so, there are rules that permit a "rollover", or transfer, of a retiring allowance into an RRSP, regardless of whether you have contribution room available. This is not a one-time rollover, but would apply to any retiring allowance that you receive.
But there are limitations. The amount that can be transferred tax-free is limited to $2,000 per year for every year worked prior to 1996 and an additional $1,500 (i.e. $3,500) for each year of service prior to 1989 during which time the employer was not a member of a pension plan or deferred profit sharing plan. The limitation on pre-1996 qualifying years would generally restrict someone from rolling over a severance package to an RRSP, unless they have been working for the same employer for a substantial period of time. For years worked after 1995, no amount may be transferred to an RRSP in respect of those years.
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