Savings & Investments

Tax Tip: Lump-sum payments from deferred profit sharing plans

If you receive a lump sum payment from a deferred profit-sharing plan, you can defer paying tax on the amount until retirement by transferring the funds directly into a qualifying account. Eligible accounts include Registered Retirement Savings Plans and Registered Pension Plans. This rule applies to lump-sum payments from retiring allowances, as well.

For example, if you receive a lump sum payment from your employer, you can keep the cash and spend it as you like, but you must pay income tax on it. In fact, your boss reports this lump sum payment as employment income on your T4 rather than as retirement income on a T4A. This expense can be unaffordable for many people, but if you transfer it into your RRSP or RPP, you don’t have to pay any income tax on the amount until you withdraw the funds during your retirement.