What happens if you’re handed a severance package?
BY Heather Holden, PhD
If you’re one of a growing number of newly unemployed professionals, then you’re undoubtedly considering your options for both immediate and long-term financial security. One of the factors in your decision-making might involve most efficient use of a severance package.
Compensation provided for a job loss is generally either in the form of salary continuance, which includes accumulated vacation pay and pay in lieu of reasonable notice, or a retiring allowance.
Salary continuance is considered employment income, so expect deductions such as tax, CPP and EI. Typically, salary continuance comes with health, insurance, and pension benefits.
A retiring allowance, on the other hand, is either a one-time payment or a fixed amount payable over a short period. Retiring allowances are fully taxable in the year received, but a portion may be eligible for transfer to your RRSP and thus gives you a deferral of tax on the amount transferred.
There are limits of the amount of your retiring allowance that you can transfer to your RRSP based on the number of years of service, which your employer will compute and report on a T4A slip. There are options to discuss with your employer regarding the treatment of this transfer with important timing and withholding tax implications.
The tax burden of a large severance package can be significant. If your retiring allowance is significantly greater than the portion eligible for RRSP transfer, hopefully you have RRSP contribution room to reduce the tax hit.
Before your employment is officially terminated, you could negotiate receiving the payment in installments over more than one tax year, especially if you don’t anticipate significant income in the following year. Access to the funds may, however, be more urgent than a reduced tax burden.
Thinking positively, if you have this luxury, I can help you identify significant investment opportunities right now. Your severance could buy you a high quality portfolio of undervalued blue-chip stocks!
Heather Holden, PhD
Wealth Advisor, ScotiaMcLeod
heather_holden@scotiamcleod.com
www.heatherholden.ca
