# Severance pay and tax rate



## ascent1 (Jan 31, 2018)

Hi,

If I receive a lump sum severance package what rate of any of tax must my company deduct in Ontario? I have heard it is tiered and topped at 30%, is this correct? Also, if it is taxed this way before it is paid out will I be taxed on it again along with my gross income? 

For example, if I get a $15,000 severance and I earn $70,000 in a year, will I be taxed on the original 15K as a withholding tax and then be taxed on $85,000 as income tax?


Thanks in advance!


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## lonewolf :) (Sep 13, 2016)

Put severance pay straight into RRSP. 

Make SURE it is DEPOSITED DIRECTLY in RRSPs or I think you will charged taxes. DO NOT have severance pay deposited into regular account then deposit into RRSPs or you will have to pay taxes. Contact employer to make sure they do it right. Will have to provide instructions for employer on how to proceed with deposit.

I kinda think if do not have enough contribution room in RRSP there is away around it ?


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## Eclectic12 (Oct 20, 2010)

ascent1 said:


> ... If I receive a lump sum severance package what rate of any of tax must my company deduct in Ontario? I have heard it is tiered and topped at 30%, is this correct?


Looks like it is correct.
https://www.canada.ca/en/revenue-ag...payments/withholding-rates-lump-payments.html




ascent1 said:


> ... Also, if it is taxed this way before it is paid out will I be taxed on it again along with my gross income?
> For example, if I get a $15,000 severance and I earn $70,000 in a year, will I be taxed on the original 15K as a withholding tax and then be taxed on $85,000 as income tax?


Both the severance pay and the employment income will be subject to withholding tax. The severance pay seems to have fewer levels.

Withholding tax is paying potentially only part of the tax or too much tax. For both severance and regular employment income, when one files the annual tax return - the actual taxable income will be known, generating the tax bill. Whatever was taken by the withholding tax will be reconciled.

Say one made a personal RRSP contribution that lowers the taxable income from what the company knew about - then too much withholding tax will have been paid, generating a refund.

Say one had other sources of income like investments that increase the taxable income - likely the withholding tax taken is too small, generating a tax bill.



Cheers


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## gibor365 (Apr 1, 2011)

> Make SURE it is DEPOSITED DIRECTLY in RRSPs


 When I got mine last year, I took it in cash and contributed to RRSP up to max I had....


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## Eclectic12 (Oct 20, 2010)

lonewolf :) said:


> Put severance pay straight into RRSP ...
> I kinda think if do not have enough contribution room in RRSP there is away around it ?


The part of the severance pay that is eligible does not use up RRSP contribution room. It is limited though.
https://www.canada.ca/en/revenue-ag...rring-eligible-part-a-retiring-allowance.html

The part that is non-eligible requires RRSP contribution room.
https://www.canada.ca/en/revenue-ag...g-non-eligible-part-a-retiring-allowance.html


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## gibor365 (Apr 1, 2011)

Eclectic12 said:


> The part of the severance pay that is eligible does not use up RRSP contribution room. It is limited though.
> https://www.canada.ca/en/revenue-ag...rring-eligible-part-a-retiring-allowance.html
> 
> The part that is non-eligible requires RRSP contribution room.
> https://www.canada.ca/en/revenue-ag...g-non-eligible-part-a-retiring-allowance.html


I came to Canada in 1999, so no first option for me


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## m3s (Apr 3, 2010)

Eclectic12 said:


> The part of the severance pay that is eligible does not use up RRSP contribution room. It is limited though.
> https://www.canada.ca/en/revenue-ag...rring-eligible-part-a-retiring-allowance.html


Interesting

I was in elementary school in 1996 so I take it I can only use RRSP room, which is what I did in 2014


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