How Does Severance Pay Affect My Taxes
If you have recently been terminated from your place of employment and have received a severance package or severance pay, you might have some questions about what comes next. Whether you are wondering, can I get unemployment after severance pay, can I collect EI if I get fired? or simply desire more information about how severance pay will affect you come tax time, there is a lot to consider.
At Soni Law Firm, we are committed to helping you understand and protect your rights as an employee. We know that losing your job is an overwhelming and stressful situation. In this article, we will provide you with some helpful information that will assist you in understanding what your severance pay will mean for you. For more information on severance pay and for a better understanding of who is entitled to severance pay, see our previous article, Understanding Severance Pay in Ontario.
Is Severance Pay Taxable in Canada?
In Canada, severance pay is considered income and therefore is taxable. You must claim any amounts paid through severance when filing your taxes and should expect that you will pay tax on this income. It is always a good idea to consult with an accountant to help you understand your taxes and benefit from any deductions available to you. Whether you receive your payment as a lump sum or as salary continuance you should still expect that you will pay tax on this income.
Is Severance Pay Considered Income for Child Support?
Severance pay is considered to be income, and, in most cases, you can expect that your severance pay will be counted as income in terms of child support obligations. It may be helpful to consult with your family lawyer when it comes to lump sum or other forms of severance pay as these issues can be complex.
Can Severance Pay Be Transferred to an RRSP?
If you are concerned about owing a large amount of tax after receiving severance pay you may wish to consider transferring your payments directly into an RRSP. Your RRSP contributions are tax-deductible and can help to offset what you will pay in tax. Before making plans for your severance pay you may wish to consider speaking with an accountant to ensure that you are making a good decision that benefits you when it comes to paying tax.
What Rate Is Severance Pay Taxed at?
When it comes to the tax rate you will pay on your severance pay it is likely best to consult with an accountant for a better understanding of your unique needs. Your employer is required to hold back between 5-30% of your severance pay if you are receiving the money through a lump-sum payment. The tax rate of your severance pay may vary if you are being paid through salary continuance rather than a lump-sum payment.
If you have yet to receive severance pay and have recently been dismissed from your place of employment it may be a good idea to consult with an experienced dismissal lawyer. By hiring a lawyer, you can ensure that your rights are protected and you receive the full amount you are entitled to.