# Severance pay, taxes, and RRSP contribution room



## A_Ferengi (Nov 24, 2016)

I was laid off and received a lump sum severance this year of roughly 20k. 30% Tax was withheld on this amount. I'm trying to figure out of this 20k creates the corresponding 18% rrsp contribution room. The information I have found, to me, seems contradictory. I have found this:



> 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.
> 
> However, keep in mind that:
> 
> ...


The part of "carrying forward the related contribution room" suggests to me that the severance pay creates the corresponding 18% rrsp contribution room. However, I have also found that there is an eligible part and non-eligible part in terms of severance. The difference being for what years of employment the severance is granted. In my case, it is all non-eligible. This suggests to me that it might not create the 18% additional contribution room. 

Logically speaking, I would expect the severance to be viewed as earned income and therefore create rrsp contribution room. It's taxed like earned income. It makes me ineligible for EI for the amount of weeks it covers, as if I were working a regular job for that duration. I'm near my contribution limit ceiling and would like to know if this additional 20k creates more room for me to contribute for the 2016 taxation year. Thanks.


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## Eclectic12 (Oct 20, 2010)

Assuming you are correct that the entire lump sum is "ineligible", CRA says:



> The non-eligible part can be contributed to your RRSP or to a spousal or common-law partner RRSP, *up to the amount of your available RRSP deduction limit ... *
> 
> If you choose to receive the non-eligible part in cash, you can make the contribution yourself to your RRSP or to a spousal or common-law partner RRSP. *Your employer will withhold tax in this situation.*


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

This reads to me like the severance will be earned income but won't add the additional RRSP contribution room until *next* year (which is why the current RRSP contribution room is needed).

You can make use of the $2K RRSP over-contribution to help out.


> Generally, you have to pay a tax of 1 % per month on excess contributions that exceed your RRSP/PRPP deduction limit * by more than $2,000*


http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/xcss-eng.html
http://www.taxplanningguide.ca/tax-planning-guide/section-2-individuals/rrsp-overcontributions/


The other question is whether you are leaving a DB pension ... if so, that is another source of additional RRSP contribution room though a pension adjustment reversal (PAR).
http://www.cra-arc.gc.ca/tx/rgstrd/papspapar-fefespfer/par-fer/menu-eng.html
http://www.milliondollarjourney.com/what-is-the-pension-adjustment-pa.htm


CRA says the ineligible severance is reported on line 130:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/trnsfrrng/nnlgbl-eng.html

As long as a reference in the calculation for the RRSP deduction limit is including line 130 or a line that sums up 130 plus other lines, it will be in the RRSP calculation.
I am not finding the CRA sample calculation and the non-CRA web sites I am finding are not specific enough.


Cheers


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## habsfan59 (Oct 23, 2012)

A_Ferengi said:


> I was laid off and received a lump sum severance this year of roughly 20k. 30% Tax was withheld on this amount. I'm trying to figure out of this 20k creates the corresponding 18% rrsp contribution room. The information I have found, to me, seems contradictory. I have found this:
> 
> 
> 
> ...



I am not sure if you found your answer but I think the following link answers it. In a nutshell, retiring allowance is not considered as a source of income that create a RRSP Contribution room: http://en.planiguide.ca/tax-plannin...programs/registered-retirement-savings-plans/

hope this helps


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