What are accrued sick days?
This payment is often referred to as the payment of ‘banked sick days’ or the ‘sick pay gratuity’. Typically these plans will permit the employee to accumulate unused sick days during each year of employment and carry them forward to retirement. Once the employee reaches retirement, they are entitled to receive these sick days as a lump sum payment or a series of payments (often with a limit such as 6 months pay).
Income tax must also be correctly reflected in the value of the accrued sick days. The employee generally has the choice of taking the payment as a taxable lump sum payment at retirement or transferring some or all of the payment to their RRSP (and deferring income tax). Under the Income Tax Act, a payment for accrued sick days at retirement is considered a retiring allowance, and employees who have service prior to 1996 can transfer some or all of this retiring allowance tax free to their RRSP. The amount of the retiring allowance that is eligible for the transfer depends on the amount of pre-1996 service an employee has with their employer, and any portion of the retiring allowance which is not eligible can only be transferred to an RRSP if the employee has existing RRSP room.
Please note that accrued sick days can also be divided using an ‘if and when’ approach: under the ‘if and when’ approach the accrued sick days would not be valued and added to the assets of one spouse but instead the actual lump sum would be split when it is paid in the future. The advantage of the ‘if and when’ approach is that the accrued sick days would not be valued; the disadvantage of the ‘if and when approach’ is that there is not a clean break between the couple and it could be many years before any payment is actually made. The choice between these two methods is a legal issue and not an actuarial issue.