Maximizing your Termination and/or Severance Pay & Retiring Allowance
Leaving a job, being terminated or retiring, ALL can and often is an emotional and stressful times. Furthermore, often important decisions need to be made such as: Income replacement options, especially on retirement, how to deal with termination or severance packages, what to do with stock option plans, how to invest for the future, without employer support.
In this article, I will focus on questions relating to dealing with your termination and/or severance package. I will be sure to add guidance to some of the other areas that must be considered later on this month. When you are leaving your job, you may receive a termination and/or severance pay, as well as retiring allowance if relevant.
When your departure is involuntary (that is, you are terminated), every jurisdiction stipulates how much notice you must receive. Termination pay, is commonly paid in lieu of actually working through the notice period. You may also be entitled to severance pay, which is payment in recognition of service, seniority, etc. The exact amount of severance will be determined by the nature of your employment arrangement and circumstances of your departure.
Termination and/or severance pay is considered employment income for tax purposes. It is important to understand the choices you may have about when and how to take your severance, and this timing can make a big difference in how much tax you may have to pay on your severance package. When lump-sum severance payments are made, your employer is required to withhold up to 30% in tax (for payments over $15,000). You will also be subject to any additional tax up to your marginal tax rate which could be 45% or more. So, with no planning, you stand to lose a significant amount of your payout to taxes.
Here are few things you can do to minimize the amount of taxes you will pay on your severance:
1. If you are leaving a job near the end of the year, you might ask your employer to defer the actual payment to the subsequent year, thereby deferring the additional tax until the next tax year and possibly reducing the tax liability if your income in the following year is lower.
2. If you can’t delay the receipt, and you have RRSP room available, utilize it, it could reduce your tax liability significantly even if you have to tap into some of that money later on.
Here is a video that speaks directly to that:
A retiring allowance is a payment from your employer either in recognition of long service or as a payment due to involuntary job loss. Retiring allowances include severance pay and unused sick leave credits, but do not include unused vacation pay or termination pay (in lieu of your notice period). Ordinarily, income received from an employer must be included in income in the year received.
Similar to termination and/or severance pay, you can do the following to maximize how much of the retirement allowance you can keep.
1. Defer it to the next calendar year.
2. Use your RRSP room if you have it.
3. If money received meets the definition of a retiring allowance, you may be able to postpone paying taxes on additional amount above your RRSP room based on the following formula: $2,000 per year or partial year prior to 1996; $1,500 per year or partial year prior to 1989 if no vested RPP/DPSP
4. Ensure you deduct legal fees if relevant.
Bottom line, getting proper financial and legal advice during this process can make a significant impact to the amount of severance, termination and retiring allowance you get and get to keep. We are here to assist and have been helping clients during this stage for over 17 years. To set up a complimentary consultation, please contact us at Contact | Simplicity Financial