What is a retiring allowance and can I shelter it in my RRSP to reduce the tax?

A retiring allowance is a payment made in recognition of long service, or in connection with the loss of your employment — legally and tax-wise, it's treated as distinct from your regular salary or wages. Because of that distinction, the Income Tax Act allows a retiring allowance to be transferred, in whole or in part, directly into an RRSP without using up your regular annual RRSP contribution room, which can meaningfully reduce the tax hit compared to simply receiving the full amount as cash.

The important catch is that this special rollover isn't unlimited. It's only available up to specific eligible amounts tied to your years of service before a particular cutoff date, and the exact eligible amount depends on your specific service history — it isn't the same for everyone, and it isn't the full amount of every retiring allowance regardless of size. Assuming your entire payment qualifies for this treatment without checking is a common and costly mistake.

Before assuming how much of your retiring allowance can go into an RRSP this way, get your specific years-of-service eligibility confirmed rather than estimating, since the difference between what you assume qualifies and what actually does can be significant, and it directly affects how much tax you'll owe on the payment.