# Advice to maximize use of severance pay



## Edge30 (Oct 27, 2012)

*** I'm new in this forum and I sent this message yesterday but it seems it didn't go through so I'm re-sending it.

I just got 'let go' from my company. I got a 28 weeks pay severance which I can elect to defer for payment in 2013. I will also receive my last payment + accrued vacations and others (this can't be deferred afaik).
I'm planning how to maximize this pay by reducing taxes and getting the most out of it possible.
Previously, I've already maximized my TFSA room: I have 20k (+interest) in it and another 20k (+interest) in my wife's TFSA (she doesn't work).
This is what I initially thought to do:

1. Ask my employer to defer 100% for pay till jan/2013
2. When it is paid, ask my employer to deposit 100% into my RRSP.
3. Of course, family will reduce expenses as possible.
4. Till EOY my family will use the last payment (which will include unpaid vacation and others) + withdrawals from my TFSA as needed. This should minimize my yearly income and 2012 taxes.
5. By EOY, any money left in my bank will go to RRSP to further reduce 2012 taxes.
5. In Jan/2013 I'd receive my severance pay into my RRSP
6. For 2013, I'll keep taking out from our TFSAs.
7. Early 2013 I should have some tax return to help me cope with expenses.
8. Around may/2013 I should start receiving EI right? then that'll help me withdraw less from TFSA
9. When TFSA are exhausted, withdraw from RRSP.

Does this plan sound like a good idea? It is simple but I don't know if I'm missing some piece of information.
- I've read in some forums that not all the severance can be put into RRSP, can anybody confirm if yes or no? I worked the last 6 years for this company.
- If not all the severance can be deposited into RRSP by my employer, I guess I can do it on myself after I receive it in my bank right? it'd be taxed before receiving it though but I can try recover the tax via increasing my RRSP contribution 2012.

Of course, the minute I step out the company I started looking for another job, I even got some phone calls already  so this plan is intended for worst scenario case.
Also, I do have plenty of room in my RRSP so that's no concern.

Any advices or adjustments to recommend?

Thanks


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## MrMatt (Dec 21, 2011)

If you are putting th payment in your RRSP, why wait till next year?
Put it in NOW, then claim the contribution whenever it makes sense.

If you expect to live on it, I'd max out the TFSA and put some in a normal unregisterred account. 

I think it is generally a bad idea to use RRSPs for short term savings for 2 reasons.
1. You permanently lose the contribution room.
2. The tax savings for a low risk investment over a year or so are negligible. A GIC or equivalent risk investment will only return maybe 2% a year, even at a 50% tax bracket your tax savings is 1% of the principal per year, which is not worth the trouble.

I'd review with Service Canada (I think they adminster EI) what the rules are, what your benefits will be etc.. You should likely start claiming EI as soon as you can.


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## 0xCC (Jan 5, 2012)

Apply for EI now, you should start getting it before the end of the year. It won't be all that much but it will help. I think the max you can get is between $700 and $800 every two weeks. If you don't need it this year you can probably defer it until January but I am pretty sure there is a time limit for applying so look into that this week.

Good luck, it is a stressful situation but it sounds like you are starting to think along the right lines but deferring income only to put it into an RSP isn't necessary.


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## Sampson (Apr 3, 2009)

0xCC said:


> I think the max you can get is between $700 and $800 every two weeks.


$956 biweekly.


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## CanadianCapitalist (Mar 31, 2009)

0xCC said:


> Apply for EI now, you should start getting it before the end of the year. It won't be all that much but it will help. I think the max you can get is between $700 and $800 every two weeks.


AFAIK, this is incorrect. OP was paid 28 weeks severance. EI will start 30 weeks (28 weeks + 2 weeks waiting period) after termination. That puts the first EI payment in June of next year.


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## CanadianCapitalist (Mar 31, 2009)

Sorry to hear about your job loss. I agree with Mr. Matt. If you are contributing to your RRSP why wait until next year? You can contribute now and even if you have taxes deducted at source, you can receive a refund in the New Year.

I'm not sure if your company can deposit your severance pay directly into your RRSP. You'd have to ask them that. Since you have plenty of RRSP room, you can easily achieve the same end results on your own.


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## 0xCC (Jan 5, 2012)

Sampson said:


> $956 biweekly.


I should have been more clear, I meant net, not gross (taxes are withheld at source).


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## 0xCC (Jan 5, 2012)

I think it depends on how the severance is paid out. In any case applying now has no downside and will allow for clarity on the situation (as neither of us is providing reference for our assumptions).


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

CC is correct. I don't think UIC wants you to apply now if you're receiving what they consider as salary continuance or severance. You should only apply when the continuance runs out. They might not even accept the application if you send it in now but if OP is in doubt he should call them.

Anyway, the point of severance is to allow a person to eat. I'm not sure why the OP is talking about investing money intended for basic life functions unless of course he has already signed for another job?

Besides, if this is going into a bank RRSP they'll want you to invest and you'll be paying fees on the money. Better off to put the money in TFSA if you insist on living with no income.


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## CanadianCapitalist (Mar 31, 2009)

0xCC said:


> In any case applying now has no downside and will allow for clarity on the situation (as neither of us is providing reference for our assumptions).


I agree. IIRC, I applied as soon as I got laid off (though it was a long time back) and EI came back with a letter saying that the EI payments will start two weeks after my severance runs out. In any case, OP should check all this with Service Canada.


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## Daniel A. (Mar 20, 2011)

It is straight forward EI starts after severance weeks run out.


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## 0xCC (Jan 5, 2012)

Daniel A. said:


> It is straight forward EI starts after severance weeks run out.


Some details here: http://www.servicecanada.gc.ca/eng/ei/types/regular.shtml#first pretty far down the page.



> 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.


So apply soon, expect that payments won't start until severance has 'run out' no matter how it was paid out.

This topic is starting to look a little like a one post wonder though, maybe Edge30 got some good news and doesn't need to worry about these details.


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## Edge30 (Oct 27, 2012)

Thanks a lot to everybody for your inputs. First of all, I was a little scared when I wrote my first post but now I settled and can think better. Your posts helped me a lot too.
I'll give you an update 'from the field', hopefully this may be of use for somebody else in the same situation.

- The severance pay is composed of several values, of them the 'pay in lieu of notice', vacations and any other regular payments (ie. travel expenses reimbursed, accrued comissions, etc) canNOT be transferred to RRSP by the employer since they are considered like a regular salary. They'll be taxed (ouch!) and I'll get the remains in the next pay date together with my regular salary for the last days worked. Of course I'll transfer them to RRSP by myself and try to also recover the taxed portion by increasing my RRSP when I can.
- Only those wages caused by the lay off can be transferred to RRSP by the company.
- I must apply to EI immediately. But the 1st payment will come after the 'separation period' which in my case is 28 weeks. (probably + 2 weeks of 'waiting period')

Some side comments
- I'm still in doubt about the calculation of the accrued vacation days. One document I received says they will be considered up to the last day of work but other adds 2 months (to account for the statutory notice period). We'll see.
- This year the company forced us to take some vacation days. I didn't want to take them, I was forced to. So I thought that maybe they would accept to return them, but they denied it. I think this is unfair.
- I also tried to convince them to give me some of my granted but un-vested RSUs. Since when granted they were calculated using a price X but now the stock is worth X/4. But they also denied it, they blamed SEC rules.

So, my original plan remains the same, except that I'll take the money now instead of waiting till january.
Thanks


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