# Tax Question about Severance



## Lusty (Feb 18, 2013)

Hello everyone,

I'm a Federal Gov employee, and recently the Government decided to eliminate our severance package. They paid it out to us, and there were some options you could take the payment in. We were given the option to put $10,000 into an RRSP (which was the max), and take a cash payout of the remainder. I took the $10,000 for RRSPs and the remainder was a cash payout.

My issues are:

When I took the $10,000 it was not taxed. I am still still waiting for something to come in the mail about transferring the $10,000 into an RRSP. Things have changed from my original plans, and now I want to use this $10,000 instead of transferring it to an RRSP. I already have the cash sitting in a saving account awaiting the forms in the mail, but I won't touch it until I know what I have to do at tax time. When I file my taxes, do I claim this as income? Will it be taxed like regular income? or taxed as a lump sum payment? Am I even able to do this or will it ring alarm bells? I'm more than happy to pay the tax on it, I just don't know what steps I need to take.

This also brings up another issue. The remainder of my severance payout was taxed. From what I've read, severance payouts should be taxed as lump sum payments, shouldn't they? The money I received was from my severance payout, since the Fed Gov wanted to eliminate our severance package. I was under the impression I would be taxed at lump sum tax rates (10%,20%,30% based on the amount), not regular income tax rates. My sum was under $10,000, so I thought that amount would only be taxed at 20%. Well I was in for a shock when I read my stub. I called my compensation department and they said it was taxed at source, so no lump sum payment taxation. I can't help but feel we're all getting screwed by this decision. What do you guys think?

Thanks in advance for any input.

L.


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## MoneyGal (Apr 24, 2009)

I understand that there are lump sum tax withholding rates (see http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/clcltng/spcl/lmpsm/wthhldng-eng.html ) but in the circumstances you are describing, I do not think your employer is required to use the lump sum calculations: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/clcltng/spcl/lmpsm/menu-eng.html

But more generally, there are no "lump sum tax rates" -- those are withholding rates (the rate at which the tax is withheld, not the final tax rate applicable on the income). Technically the income you received is NOT severance pay, it is pay in lieu of severance. It should be taxed as ordinary income, unless it is diverted to an RRSP, and there are limits on how much of this income can be directed to an RRSP. You should expect to pay tax on the income you received at your marginal rate.


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## Lusty (Feb 18, 2013)

Ok, that sort of makes sense. I can't help but feel we got the short end of the stick but oh well.

I'm still wondering about the taxation on the $10,000. Originally I wanted it transferred to a RRSP so the tax was withheld, but things have changed and I now want to use that as income. Do I just claim it on my income tax form as income and pay the tax then? Can I do this?

Thanks.


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## OptsyEagle (Nov 29, 2009)

Yes. Since it was $10,000 or less, your employer was allowed to save the increased paperwork load of transferring that money directly to your RRSP, by using the honor principle where they give the money to you and you promise to put it into an RRSP. 

The amount you received will be recorded on your T4 as employment income whether you put it in the RRSP or not. Since no tax was withheld from it, the amount you owe will be figured out when you do your tax return for that year, and you will be required to pay the taxes on it, at that time. If it goes into an RRSP before the end of that year (or 60 days into the next) you will receive an RRSP receipt that will eliminate the taxes that would be payable on that amount.

As long as you are OK with that (you will owe somewhere between 20% to 45% of it in taxes, depending on your total taxable income for that year) there will be no other penalties rendered. 

I guarantee you, that you are not the first person to decide to say YES to the first question "hey would you like to avoid some income taxes", and then later when the money hits their bank account to say YES to a new question like "hey can you think of anything you would like to have or do with $10,000?"


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## H&R Crock (Mar 22, 2013)

*Is there any recourse for a 30% withholding tax?*

I received a $24,000 severance package in August of last year, which turned into a deposit of $16,800 due to a 30% withholding tax. I wasn't eligible for employment insurance for 24 weeks based on the pre-tax amount, and my T4 doesn't reflect the taxation as well. I assumed I was going to receive some sort of refund at tax time, but I now have to pay an amount because my reported income is inflated. Is there something I can do about this ludicrous 30%?


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