# Severance Experts?



## crazyjackcsa (Aug 8, 2010)

I was severed today from my employer. I'm wondering about the withholding tax. If my former employer can't or won't transfer it directly into an RRSP, can I do it myself and avoid the withholding tax? Does it have to be all, or can it be a portion?


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## Beaver101 (Nov 14, 2011)

Not a severance expert here but a casualty once upon a time ... but I think part of the answer to your severance (aka retiring allowance) question lies here,

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/trnsfrrng/lgbl-eng.html


> *Transferring the eligible part of a retiring allowance*
> 
> You can transfer part of your retiring allowance directly or indirectly to your RRSP or your registered pension plan (RPP). You cannot transfer any part directly to a spousal or common-law partner RRSP. Also, amounts cannot be transferred to an RRSP if you were over 71 years old at the end of the tax year. For more information, see RRSP options when you turn 71.
> 
> ...


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## moisimplementmoi (Oct 20, 2014)

Beaver101 said:


> Not a severance expert here but a casualty once upon a time ... but I think part of the answer to your severance (aka retiring allowance) question lies here,
> 
> http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/trnsfrrng/lgbl-eng.html


btw, this applies to any employment you had with the employer, doesn't have to be the current one... if you were a summer student in 1985 it counts. What the RA allowance does, is that it does not use up any RRSP room.


As for the rest of the Severance, i have had severance in the past contributed directly to my RRSP... so you need contribution room, it is not a Transfer


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## crazyjackcsa (Aug 8, 2010)

It's after 1996. I'm pretty young still and starting a new job, I just don't want to get hit with this withholding tax, it's going to be around around a 20% hit.


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## moisimplementmoi (Oct 20, 2014)

crazyjackcsa said:


> It's after 1996. I'm pretty young still and starting a new job, I just don't want to get hit with this withholding tax, it's going to be around around a 20% hit.


actually be careful on withholding tax, since it's low vs marginal tax if you have other income. many people around me got some nasty surprises when they did their tax return following year. 

ask your now former employer if they will allow to have the severance contributed to RRSP. But make sure you have the room for it. Also don't sign anything until you have considered everything you are losing


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## Eclectic12 (Oct 20, 2010)

crazyjackcsa said:


> ... If my former employer can't or won't transfer it directly into an RRSP, can I do it myself and avoid the withholding tax? Does it have to be all, or can it be a portion?


If your employer won't transfer to the RRSP directly ... I doubt one can avoid the withholding tax as it would be taxable income. Putting it into your RRSP where you have RRSP contribution room, would then give an deduction but that won't become available until the tax return is filed.

http://www.fcac-acfc.gc.ca/Eng/forConsumers/lifeEvents/losingJob/Pages/makingTh-optimise.aspx

The only mention in this link of avoiding the withholding tax is a direct transfer to one's RRSP.
http://www.fcac-acfc.gc.ca/Eng/forConsumers/lifeEvents/losingJob/Pages/incomeTa-limpotSu.aspx

And this one explicitly says anything but a direct RRSP transfer is subject to the withholding tax.
http://www.fcac-acfc.gc.ca/Eng/forConsumers/lifeEvents/losingJob/Pages/incomeTa-limpotSu.aspx


Here is more of an overview.
http://retirehappy.ca/dealing-with-your-severance-allowance/


Cheers


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## Eclectic12 (Oct 20, 2010)

moisimplementmoi said:


> ... What the RA allowance does, is that it does not use up any RRSP room...


Misread RPP for RRSP .... deleted irrelevant info about PAs as OP wants to transfer to RRSP.


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## crazyjackcsa (Aug 8, 2010)

Thanks. So a lot of this helps. But I have one more question. Since all of my time working is POST 1996 does that mean there is no way to avoid the Withholding tax?


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## moisimplementmoi (Oct 20, 2014)

crazyjackcsa said:


> Thanks. So a lot of this helps. But I have one more question. Since all of my time working is POST 1996 does that mean there is no way to avoid the Withholding tax?


from CRA

No taxes will be withheld if you have your employer transfer your severance amounts directly to a registered retirement savings plan (RRSP), if your plan has room.


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## sags (May 15, 2010)

From Turbo Tax......

*How Severance Payments Get Taxed in Canada*

Retiring from a job that you held for many years or losing your job due to downsizing may entitle you to receive compensation in the form of severance pay, also called a retiring allowance.

According to Jeff Duguid, CPA, CA, a seasoned personal income tax preparer in Osoyoos, “severance pay is money and benefits you may be entitled to if you are let go without cause. Termination pay is not severance pay.” Severance pay is reported on Line 130 of your tax return.

*Taxable as Income*

You may choose to receive the severance pay directly as a lump sum. In this case, the amount should be included in the income you report on your tax return. Tax will be deducted from the severance pay if it is paid directly to you, because your former employer is obliged to withhold an amount for tax.

“Severance pay is taxable when received and is subject to withholding tax rates between 5 percent and 30 percent, depending on the province that you reside in and the amount of the severance,” says Duguid.

*Transfer of Eligible Severance Pay*

With planning, you may be able to reduce the amount of tax payable on the severance pay. “You can avoid the withholding tax by choosing to transfer the severance allowance directly into your RRSP or RPP,” Duguid points out.

Transferring into a registered retirement savings plan or registered pension plan shelters the money from tax by reducing your taxable income. How this affects your RRSP deduction limit depends on how much of the severance pay is designated eligible.

The eligible and non-eligible portions are shown on the T3 or T4 slip given to you. “For a portion of your severance pay to be an eligible retiring allowance, the severance payment received has to be for your employment services prior to 1996,” says Duguid. 

The eligible amount can be directly transferred to your RRSP, without affecting your RRSP deduction limit. It is akin to being allowed extra RRSP contribution room.

That means you can transfer all of the eligible portion of the severance pay into your RRSP, even if you have no deduction room left.

However, the eligible portion cannot be transferred to your spouse or common-law partner’s RRSP.

In addition, persons older than 71 years of age at the end of the tax year are not permitted to transfer any portion of a retiring allowance into their own RRSP.

*Non-Eligible Severance Pay*

If you don't have employment service years prior to 1996 that are applicable to the severance payment, the severance pay will be non-eligible. Non-eligible severance pay still may be transferred directly into an RRSP to shelter it from tax, but only if you have contribution room left.

You also may transfer it to a spouse or common-law partner’s RRSP if she has enough contribution room. Any amount left over will be subject to tax.

*Other Considerations*

You may be eligible for other deductions if you have non-eligible severance pay. “Legal fees incurred to collect or establish your right to a severance payment can be tax deductible to the extent that the severance payment itself is not sheltered by transfers to your RRSP or RPP plan,” notes Duguid.

Be sure to obtain detailed receipts from your lawyer if you went to court to get severance pay.

http://turbotax.intuit.ca/tax-resources/tax-compliance/severance-payments-taxed-in-canada.jsp


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## My Own Advisor (Sep 24, 2012)

Great stuff sags.

Seems to me, without doing any math on this or knowing your math in this case, if you have RRSP contribution room, some or most of the *non-eligible severance* should go there. 

This:
a) reduces your RRSP contribution room,
b) provides you with the government-loan as part of next year's tax return (i.e., money back), and
c) provides tax deferred growth.

If your severance is eligible, also consider the RRSP, since you effectively have extra RRSP room to grow.


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## moisimplementmoi (Oct 20, 2014)

> Other Considerations
> 
> You may be eligible for other deductions if you have non-eligible severance pay. “Legal fees incurred to collect or establish your right to a severance payment can be tax deductible to the extent that the severance payment itself is not sheltered by transfers to your RRSP or RPP plan,” notes Duguid.
> 
> Be sure to obtain detailed receipts from your lawyer if you went to court to get severance pay.


actually the easiest way for this to be handled, is to have to Legal fees paid out of the severance, and rest put into RRSP, if you have the room


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## ensanimal (Sep 28, 2014)

http://www.cra-arc.gc.ca/E/pbg/tf/t1213/README.html

It depends on how your employer is going to report it. If it's not a true "eligible retiring allowance" you need to have the available RRSP room. If you do and are only going to get the money in 4-6 weeks (probably not) you can fill in the T1213 above to have CRA approve the payment with no tax withheld.


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## MikeM (Oct 23, 2014)

I also recently was let go from my job and have received a severance package.
I am asking my former employer to defer some of the payments to 2015.

Since mine is a non-eligible severance I plan on having them top off my 2014 RRSP limit.

Because some of the payments will be deferred into 2015, does anyone know, or can someone confirm if I can have a second portion of the severance placed directly into my RRSP (non taxed) in January and use that towards my 2015 RRSP limit?

Example: 7000 for 2014 and then 7000 more in January for the 2015 limit.


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