# severance pkg split



## bobmac (May 13, 2011)

I got a severance package from work. total amount will be approx $70k. 

I have the option of splitting it between this year and next year. 

current ytd gross earnings are approx $30k, and taxes deducted = $9000. 

I'm thinking the best way to minimize tax is to create 2 yrs with the same
gross income, which in this case means $100k/2 = $50k.. 

So I take $20K in 2011 (now additional tax taken, because i've already paid $9000 ytd), and $50k (with withholding tax at 18%) on Jan 1, 2012. 

does this sound right ? 

or should i take it all this year, and be taxed at a marginal rate based on 
making $100k this year ?


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## Four Pillars (Apr 5, 2009)

Seems like splitting is preferable to taking it all now.

What about EI? Is there a period next year when you'll be eligible? It probably won't matter too much, but should be considered.


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## GeniusBoy27 (Jun 11, 2010)

Also, shouldn't you consider the possibility of working next year?


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## Guest (May 13, 2011)

bobmac said:


> I got a severance package from work ... total amount will be approx $70k


Fwiw ... $40K of my severance can roll directly into an RRSP ... perhaps the same applies for you?


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## Four Pillars (Apr 5, 2009)

rikk said:


> Fwiw ... $40K of my severance can roll directly into an RRSP ... perhaps the same applies for you?


I believe the rule is that you can roll $2,000 for each year that you worked (for that company) prior to 1996.


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## Toronto.gal (Jan 8, 2010)

What happens to the $50K if you take 2 payments? You won't receive interest on it, so that sum of money will be doing nothing for a year? I don't know, I'm just asking. Consider also whether it would be beneficial to use some of the money now to pay off any debt, ie: mortgage, etc.

http://www.taxtips.ca/personaltax/employees/severance.htm


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## bobmac (May 13, 2011)

i excluded consideration to potential loss of investment income by taking it all now and putting it in the bank, because of current deposit rates. I figured I'm ahead of the game with the diff between 18 and 25% marginal tax rates (ie. 7%)


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## the-royal-mail (Dec 11, 2009)

Yeah, after thinking about this and reading toronto's post, you should take the money and run. If the org is paying out severance you don't know what their future is like. They could disappear tomorrow before you get your 2nd pmt. Think of all those Nortel employees. Better to take all the money now and perhaps shield the money you don't need into your RRSP. You could put some of it in your TFSA for easier future access (in case you are unemployed and might need it, and assuming you have room) but you would still be paying tax on it.


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## Four Pillars (Apr 5, 2009)

Good point that the company might not be around next year - that should be evaluated.

However, 

According to taxtips.ca, in Ontario - someone making $50k for two years will pay $18,072 in tax (assuming the tax rates are the same for next year).

If they make $100k in one year, the tax payable will be $27,582 which is close to $10,000 more.

I'm ignoring the possibility that EI payments or other income could enter the picture at some point.

$10,000 in after-tax cash is an expensive insurance premium. I'm assuming you would arrange to get the 2012 payment for the beginning of January 2012? That's only 7 months away - the company would have to be in pretty rough shape not to make it that far.


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## CanadianCapitalist (Mar 31, 2009)

IMO, the first question you should be asking is: how confident are you the company will be around next year? What if you can't collect on the severance arrears?

The second question is how much RRSP room do you have? If you have plenty of RRSP room, you can still defer your taxes to a future year (by contribution to the RRSP this year and pulling it out in a future year, albeit at the loss of RRSP room).


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## Toronto.gal (Jan 8, 2010)

I was thinking 2011/2012, but you're right FP, if he takes the 2nd payment in Jan./2012, that = 7 months; still 7 months IMHO, is a long time for someone to be holding $50K, especially if a lot of it could be deferred in taxes and/or reduce or pay debts [depending on interest rate]. 

For EI purposes, you need to apply right away following termination, though payments would not be issued until after your qualifying period. Remember that severance payments = income. Also, if payments equal 2 years, there would be zero payments. I believe the rationale for this is that person should have been able to find employment during the 2 year period [unless rules have changed].

http://www.servicecanada.gc.ca/eng/ei/types/regular.shtml#Example1

*"If your employer made a payment to you when you stopped working*
When you stopped working, you may have received severance pay, vacation pay, or an amount that was put into an RRSP. If this is the case, the date on which you begin to receive benefits may be delayed.
For example, if you received severance pay equal to 12 weeks of earnings, the payment of your regular benefits will be delayed by 12 weeks, whether you received this amount as a lump-sum payment or it was paid to you over 12 weeks. In this situation, *you will still have to file a benefit claim as soon as you become unemployed so that your claim can be processed as quickly as possible.*

You may also receive severance pay, vacation pay, or termination pay after filing your benefit claim. These amounts must also be reported; they will be processed in the same way as if you received them when your employment ended. The addition of these amounts to your insurable earnings may, among other things, extend the duration of your benefit claim or increase the amount of the benefits to which you are entitled. However, you could be in a situation where you do not know whether you will receive the severance pay that you are owed (for example, if your employer declares bankruptcy). You may be required to pay back part or all of the EI benefits that you received if severance pay was paid to you afterwards. If you believe that you are in this situation, contact us. If you receive vacation pay or pay in lieu of notice following a layoff, these amounts are insurable and will be included in the calculation of your weekly average earnings."

Good question for an accountant.


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## Four Pillars (Apr 5, 2009)

Thanks for the info Tdot Gal. I wasn't aware that if the severance covered 2 years of income, there would be no EI. Which makes sense of course.

CC brings up a very good strategy of using RRSPs (if possible). The OP could take the $70k payout and put as much as possible into the RRSP, although he might have to borrow in order to get to $50k in contributions for this year.

Next year he could start withdrawing - he could even stretch the withdrawals out past 2012.


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## cardhu (May 26, 2009)

CanadianCapitalist said:


> The second question is how much RRSP room do you have?


Before considering using up any RRSP contribution room, you should first find out whether any of your severance is eligible for a "retiring allowance" rollover. Such rollovers do not deplete RRSP contribution room.


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