Severance Tax Calculator Canada
Severance pay (retiring allowance) is fully taxable, but employers only withhold 10-30%. You may owe more at tax time — or save tax by transferring eligible amounts to your RRSP.
Key Facts About Severance Tax in Canada
- 1. No CPP or EI — retiring allowances are exempt from Canada Pension Plan and Employment Insurance deductions
- 2. Employer withholds 10% / 20% / 30% depending on amount (Quebec: different split between federal and provincial)
- 3. Pre-1996 service: $2,000/year eligible for direct RRSP rollover (no room needed)
- 4. Pre-1989 with no vested pension: extra $1,500/year RRSP rollover
- 5. Actual tax is based on your combined federal + provincial marginal rate, not the withholding rate
Severance Details
Severance Tax Summary
Effective Tax Rate
30.0%
Combined Marginal Rate
30.0%
Withholding vs. Actual Tax
No CPP or EI deducted: Retiring allowances (severance pay) are not subject to Canada Pension Plan contributions or Employment Insurance premiums.
Withholding is an estimate: Your employer withholds tax at the prescribed lump-sum rate (10%/20%/30%), but your actual tax is based on your marginal rate. Any difference is settled when you file your tax return.
How Severance Is Taxed in Canada
What Is a Retiring Allowance?
The CRA defines a retiring allowance as an amount received upon or after retirement from an office or employment in recognition of long service, or as compensation for loss of employment. This includes severance packages, termination pay, and wrongful dismissal settlements. Despite the name, you do not need to be "retiring" — the term applies to anyone leaving a job.
Taxed as Regular Income
A retiring allowance is added to your total income for the year and taxed at your combined federal and provincial marginal rate. If you earn $70,000 in salary and receive $40,000 in severance, you are taxed on $110,000 of total income. The severance portion is taxed at whatever marginal bracket that additional income falls into — which is often higher than the lump-sum withholding rate your employer applies.
Lump-Sum Withholding vs Actual Tax
Your employer is required to withhold tax at prescribed lump-sum rates (10%, 20%, or 30% outside Quebec). These rates are estimates, not your final tax. If your actual marginal rate is higher — common for mid-to-high income earners — you will owe additional tax when you file your return. Conversely, if the withholding exceeds your marginal rate, you receive a refund.
No CPP or EI Deductions
Unlike regular employment income and bonuses, retiring allowances are not pensionable earnings under the Canada Pension Plan and are not insurable earnings under Employment Insurance. Only income tax applies. This makes the net calculation different from a bonus of the same amount.
RRSP Rollover Opportunity
If you have years of service before 1996, you can transfer a portion of your retiring allowance directly to your RRSP without using your regular contribution room. The eligible amount is $2,000 per pre-1996 year, plus an additional $1,500 per pre-1989 year where you had no vested rights in an employer pension plan. This direct transfer avoids withholding tax entirely and reduces your taxable income for the year.
Lump-Sum Withholding Rates
Non-Quebec Provinces
| Severance Amount | Withholding Rate |
|---|---|
| Up to $5,000 | 10% |
| $5,001 to $15,000 | 20% |
| Over $15,000 | 30% |
Quebec
| Severance Amount | Federal Withholding | Provincial (Revenu Québec) |
|---|---|---|
| Up to $5,000 | 5% | 14% |
| $5,001 to $15,000 | 10% | 14% |
| Over $15,000 | 15% | 14% |
RRSP Rollover Eligibility
| Service Period | Eligible RRSP Transfer per Year | Condition |
|---|---|---|
| Before 1996 | $2,000/year | All qualifying service |
| Before 1989 | +$1,500/year | Only if no vested employer pension |
| 1996 and later | $0 | Not eligible for rollover |
The rollover does not use your regular RRSP contribution room. It must be transferred directly from your employer to your RRSP (or RPP) to avoid lump-sum withholding.
Worked Example: $40,000 Severance in Ontario
Consider an Ontario employee earning $70,000 in annual salary who receives a $40,000 retiring allowance after 15 years of service (5 of which are pre-1996, none pre-1989).
Step 1: Employer Withholding
Since the severance exceeds $15,000, the employer withholds at 30%:
30% x $40,000 = $12,000 withheld
Step 2: Actual Marginal Tax
Total income: $70,000 salary + $40,000 severance = $110,000.
The severance is taxed at the marginal rate for income between $70,000 and $110,000. In Ontario for 2026, the combined federal + provincial marginal rate on this range is approximately 29.65% to 31.48%. The actual tax on the $40,000 severance is roughly $12,100 — close to the 30% withholding, so little additional tax is owed at filing.
Step 3: RRSP Rollover
With 5 pre-1996 years of service (no pre-1989 years without pension): 5 x $2,000 = $10,000 eligible for RRSP rollover.
If the $10,000 is transferred directly to the RRSP, taxable severance drops to $30,000. At a ~30% marginal rate, the tax savings are approximately $3,000.
Without the RRSP rollover, the employee takes home roughly $28,000 from the $40,000 severance. With the rollover, they take home about $21,000 in cash plus $10,000 sheltered in their RRSP — same total value, but $3,000 less tax paid now.
Frequently asked questions
How is severance taxed in Canada?
Severance pay (called a "retiring allowance" by the CRA) is fully taxable as income. It is added to your other employment income and taxed at your combined federal and provincial marginal rate. However, it is not subject to CPP contributions or EI premiums. Your employer withholds tax at the prescribed lump-sum rates (10%, 20%, or 30% depending on the amount), but your actual tax is settled when you file your return.
What is a retiring allowance?
Under the Income Tax Act, a retiring allowance is an amount received on or after retirement from an office or employment, in recognition of long service, or for loss of employment. It includes severance pay, termination pay, and damages for wrongful dismissal. It does not include pension benefits, death benefits, or employment insurance payments.
Do I pay CPP and EI on severance?
No. Retiring allowances are exempt from Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums. Only income tax is deducted. This is a key difference from regular employment income and bonuses, which are subject to both CPP and EI.
What are the lump-sum withholding rates?
For provinces other than Quebec: 10% on amounts up to $5,000, 20% on amounts from $5,001 to $15,000, and 30% on amounts over $15,000. For Quebec: federal rates are 5%/10%/15% at the same thresholds, plus separate provincial withholding of 14% on the full amount.
Can I transfer severance to my RRSP?
Yes, but only for eligible service before 1996. You can transfer $2,000 per year of pre-1996 service directly to your RRSP (or RPP) without using your regular RRSP contribution room. If you also have pre-1989 years where you had no vested rights in an employer pension, you can transfer an additional $1,500 per year. Service after 1995 is not eligible.
How does RRSP rollover reduce my tax?
When you transfer the eligible portion of your retiring allowance directly to your RRSP, that amount is excluded from your taxable income for the year. This reduces the income tax you owe at your marginal rate. The transfer must be made directly by your employer to your RRSP to avoid lump-sum withholding tax being deducted first.
Are Quebec severance rules different?
Yes. Quebec has its own provincial withholding rates for lump-sum payments. The federal withholding for Quebec residents is lower (5%/10%/15%) because of the 16.5% Quebec Abatement on federal tax. Revenu Québec applies a separate provincial withholding of 14%. The combined withholding rates are roughly similar to other provinces, but the split between federal and provincial differs.
Should I spread severance across tax years?
If your employer offers the option, deferring part of your severance to January of the following year can reduce your marginal tax rate in both years. This works best when the severance is large relative to your salary. However, this is only possible if your employer agrees — the CRA taxes retiring allowances in the year they are received.
Sources
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Last updated: April 2026