How to avoid tax on severance pay in Canada – MoneySense

If you happen to obtain a big severance fee out of your employer, the tax payable could be vital. A protracted-time worker who receives a 12-month severance fee late within the calendar 12 months, for instance, can find yourself with two years price of earnings in a single 12 months. For a lot of staff, this can be the 12 months they’ve the best tax bracket and pay essentially the most tax of their total profession.

Some employers supply a severance as a wage continuance. This implies your wage continues to be paid for a sure time frame. Many employers desire to pay a lump sum fee. Some employers might be prepared to defer the fee to a future calendar 12 months or pay a big severance over a number of years. An employment lawyer can assist you assess your entitlement and negotiate phrases earlier than you conform to log out on a severance supply.

Taxes on lump sum severance pay in Canada

Within the case of a lump sum severance late within the calendar 12 months, asking your employer to defer the fee to January could end in much less mixed tax, Andrea.

For instance, an worker incomes $75,000 of wage in British Columbia could pay about $14,000 of earnings tax. If they’ve a $75,000 wage and a $75,000 severance fee multi function 12 months, they might pay practically $41,000 of tax. If the $150,000 was cut up between two separate years, it might end in about $28,000 of tax, or round $13,000 of tax financial savings.

Think about RRSP contributions

A standard tax discount technique with a severance is to contribute to a registered retirement financial savings plan (RRSP). An worker with a whole lot of gathered RRSP room could possibly deposit some or all of their severance on a pre-tax foundation. An employer could be instructed to deposit a severance on to an RRSP.

If you happen to obtain the fee in money first with earnings tax withheld, after which contribute to an RRSP, the disadvantage is that you should have much less after-tax money to make the contribution. It’s essential to then look ahead to a tax refund as properly.

A protracted-time worker could possibly make the most of an eligible retiring allowance in the event that they labored for his or her employer in 1995 or earlier. This may increasingly enable further RRSP contributions over and above an worker’s common RRSP room.

In response to Canada Income Company, the eligible a part of the retiring allowance is: