Does my employer have to withhold tax on a retiring allowance before paying it to me?

Generally, yes. Even though a retiring allowance is legally distinct from regular salary, your employer generally still has to withhold tax at source before paying it to you, and you shouldn't assume it arrives tax-free just because it isn't called "salary" or "wages." Withholding on a retiring allowance is a real and common source of confusion, since people sometimes expect the entire lump sum to land in their account without any tax taken off first.

The main way this withholding can be reduced or avoided is if the eligible portion of the retiring allowance is transferred directly into an RRSP, up to your specific eligible rollover amount — that direct transfer can reduce or eliminate withholding on the portion actually transferred, since it isn't being paid out to you as cash in the first place. Any amount paid to you directly, rather than transferred, is generally subject to withholding in the ordinary way.

Because the eligible RRSP rollover amount depends on your specific years-of-service history and isn't automatically the full amount of your payment, it's worth confirming both your eligible transfer amount and how the remaining, non-transferred portion will be withheld before assuming what you'll actually receive after tax.