Severance Tax Calculator 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.

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.

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.

For provinces other than Quebec: 10% on amounts up to $5,000, 20% on amounts from $5,001 to $15,000, 30% on amounts over $15,000. For Quebec: federal rates are 5%/10%/15% at the same thresholds, plus separate provincial withholding of 14% up to $5,000, 19% above that (Revenu Québec) — not a flat rate. These are withholding estimates only — your actual tax depends on your marginal rate.

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 for this special rollover.

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. The transfer must be made directly by your employer to your RRSP to avoid withholding. If you receive the money first, tax is withheld, and you can still contribute but must wait for a refund when you file.

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 its own provincial withholding, tiered at 14% up to $5,000, 19% above that — not a single flat rate. The combined withholding rates are roughly similar to other provinces, but the split between federal and provincial differs.

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, not when they are earned.