Yes, in Ontario, both a true “Retiring Allowance” (as strictly defined by the Canada Revenue Agency) and statutory severance pay under the ESA are entirely exempt from WSIB premium calculations. However, pay in lieu of notice (termination pay) and vacation pay are considered insurable earnings, meaning employers must pay WSIB premiums on them.
When an Ontario business downsizes, restructures, or terminates an employee, the payroll department faces a complex web of compliance. Whether your company is headquartered in Ottawa, Mississauga, or Kitchener, issuing a final payout to a departing worker requires careful categorization. If you classify the final payment incorrectly, you could unnecessarily pay thousands of dollars in excess premiums to the Workplace Safety and Insurance Board (WSIB).
The WSIB charges employers a premium based on their total “insurable earnings” payroll. ⚠ Generally, almost everything you pay an active worker-regular wages, overtime, bonuses, and standard termination pay-must be reported to the WSIB. However, under WSIB OPM Policy 14-02-08, statutory severance pay (under the ESA) and retiring allowances are classified as non-insurable items and are excluded from your insurable payroll.
Confusing standard termination pay (pay in lieu of notice) with non-insurable severance pay or retiring allowances is a leading cause of failed WSIB payroll audits. To optimize your corporate taxes and premium rates, your HR and payroll teams must understand exactly how to structure and report these final payments. Below is a step-by-step guide to legally exempting payouts from WSIB premiums in Ontario.
Step-by-Step Process for Classifying Severance in Ontario
Properly categorizing a termination payout requires coordination between your employment lawyer and your payroll accountant. Whether you are letting go of an executive in Toronto or a warehouse manager in Brampton, follow these steps to ensure WSIB compliance. 📋
Step 1: Understand the CRA Definition of a Retiring Allowance
You cannot just call a payment a “retiring allowance” because it sounds nice. Under the CRA rules, a retiring allowance is an amount paid to an employee upon loss of employment or in recognition of long service. It usually encompasses the portion of a settlement package that goes above and beyond the statutory minimums required by the Ontario Employment Standards Act (ESA).
For example, if the ESA requires you to pay 4 weeks of termination pay (pay in lieu of notice), that specific 4-week amount is regular income (insurable for WSIB). 💲 However, under WSIB OPM Policy 14-02-08, statutory severance pay for long service (severance pay) and any additional common-law retiring allowances are classified as non-insurable items, meaning they are completely exempt from WSIB premium calculations.
Step 2: Exclude the Allowance from WSIB Calculations
Once your accountant or lawyer confirms a portion of the payout qualifies as a retiring allowance or statutory severance, you must separate it on your payroll ledger. When you log in to the WSIB portal to report your monthly or quarterly payroll, do not include these exempt amounts in your total insurable earnings box.
If you accidentally include it, you will be paying your WSIB premium rate (e.g., 1.5%) on those amounts, which is an unnecessary waste of corporate funds. ⚠ Ensure your payroll software is configured to map retiring allowances and statutory severance strictly to non-WSIB codes.
Step 3: Issue the Correct T4 and ROE Codes
The WSIB conducts audits by cross-referencing your payroll records with your CRA filings. You must report the retiring allowance correctly on the employee’s T4 slip (using specific codes in the “Other Information” area, such as Code 66 or 67 for non-eligible retiring allowances).
On the Record of Employment (ROE), retiring allowances and severance pay must be documented properly so they do not interfere with the employee’s Employment Insurance (EI) claim. 📧 If the WSIB audits you and sees a discrepancy between your WSIB reporting and your T4 summaries, they will demand an explanation.
Step 4: Prepare for a WSIB Payroll Audit
The WSIB regularly audits Ontario employers to ensure they are not under-reporting their payroll. If you recently had a mass layoff and reported surprisingly low insurable earnings for the year, you may trigger an audit. Keep copies of the termination letters, legal settlement agreements, and payroll ledgers securely on file for at least seven years to prove to the WSIB auditor that the funds were indeed WSIB-exempt severance or retiring allowances.
How Much Can You Save in Ontario?
Classifying payments correctly can result in significant financial savings for the employer. WSIB premiums are calculated as a percentage of every $100 of insurable payroll, up to an annual ceiling. Here is how the costs and savings generally break down:
| Payroll Classification | WSIB Premium Implication |
|---|---|
| Regular Wages & Overtime | Fully subject to WSIB premiums |
| ESA Statutory Termination Pay (In Lieu of Notice) | Fully subject to WSIB premiums |
| ESA Statutory Severance Pay | 100% Exempt from WSIB premiums |
| CRA Retiring Allowance (Common Law Severance) | 100% Exempt from WSIB premiums |
If your company’s WSIB premium rate is $2.00 per $100 of payroll, and you pay out $100,000 in retiring allowances and statutory severance during a corporate restructuring, properly exempting this amount will save your company $2,000 CAD in WSIB premiums. 💵
How Long Does the Process Take?
Properly categorizing a retiring allowance must happen at the exact time of termination, usually within 1 to 2 weeks of the employee’s departure. You must process the final pay and issue the Record of Employment (ROE) within five calendar days of the end of the pay period in which they were terminated.
The WSIB reconciliation happens annually. ⌛ By March 31 of the following year, your business must submit its annual premium reconciliation to the WSIB, matching your reported insurable earnings to your CRA payroll totals and proving your exemptions.
Frequently Asked Questions (FAQ)
Can an employee request their severance be a retiring allowance?
Employees often prefer retiring allowances because they can transfer these funds directly into a Registered Retirement Savings Plan (RRSP) without having immediate income tax deducted. However, the employer can only classify it as a retiring allowance if it legally meets the CRA’s strict definition.
Is pay in lieu of notice exempt from WSIB?
No. If you pay an employee their regular wages for two weeks instead of giving them two weeks of working notice (as required by the Employment Standards Act), this is considered standard termination pay. It is fully subject to WSIB premiums, CPP, and EI deductions.
What happens if I accidentally paid WSIB premiums on a retiring allowance?
If your payroll department made an error and over-reported your insurable earnings to the WSIB, you can request a premium adjustment. You generally have up to three years to amend your WSIB payroll reports and request a refund or credit for the overpaid premiums.
Are WSIB Loss of Earnings (LOE) benefits taxable?
While this article focuses on employer premiums, it is worth noting for workers that WSIB LOE benefits are generally not taxable. However, the WSIB will issue a T5007 tax slip, which must be reported on the worker’s tax return to calculate their net income, even though they will not pay tax directly on those WSIB funds.
Do we need a lawyer to structure a retiring allowance?
While routine terminations can be handled by experienced payroll HR, it is highly recommended to consult an Ontario employment lawyer for large severance packages or “common law” notice settlements. They will draft a Full and Final Release that specifically designates the funds to optimize tax and WSIB exemptions safely.
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