Are You Expecting a Severance?

Severance pay (also called a retiring allowance) is an amount paid to a retiring employee for recognition of long service or for termination of employment. Severance pay typically includes:

  • Payment as a result of termination without cause (such as downsizing)
  • Payments for unused sick leave

Severance pay does not include:

  • Salary, wages, bonuses or overtime pay
  • Pension benefits

Severance pay is taxable and subject to tax withholding. To reduce the impact of taxation, consider transferring all or a portion of your severance pay to a registered pension plan (RPP) or RRSP.

If you are going to receive a severance, ask if you can elect to split the payments between the year of termination and the following year. This may be beneficial from a tax perspective if the deferred amount would be taxed at a lower rate in the following year.

Transfer of Severance to an RPP or RRSP

You may be able to request that your employer transfer a portion or all of your severance directly to an eligible RPP or RRSP. Your severance pay may be designated as an eligible or non-eligible amount. You will have an eligible amount if you have employment service dating back prior to 1996 with the employer that terminated you without cause. The eligible amount can be transferred directly to an RRSP without affecting your RRSP deduction limit; however, it cannot be transferred to a spouse or partner’s RRSP.

The non-eligible amount can still be transferred to an RRSP but only up to your available RRSP deduction limit. As an alternative, you may transfer it to a spousal RRSP. Check your T4A statement for the amount of your eligible and non-eligible severance.

If you went to court to establish your right to a severance payment, you may be able to deduct the legal fees you incurred on the non-eligible portion of the severance.