How to Minimize Taxes on Severance Payments

If you leave your job and you receive a severance payment, it is important to do tax planning, otherwise, you risk losing a big chunk of your severance package to the tax man.

Top 3 Ways to Minimize Taxes on Severance Payments

1) Transfer your severance payments to your RRSP. Eligible severance can be transferred to your RRSP without affecting your RRSP room. Ineligible severance can be transferred to your RRSP as well, as long as you have the RRSP contribution room available. Speak with your Human Resources manager to determine how much of your severance is eligible versus ineligible.

2) Do not take a lump sum cash severance payment. While it’s tempting to have cash in your hands, your tax payable will be very high because the cash lump sum severance payment will all be included in your income in the year of receipt. If you absolutely must receive cash, then ask your employer to spread out the severance payments over two or three years, that way your marginal tax rate will not be very high.

3) If you paid legal fees to collect your severance, than you can deduct those legal fees on your tax return.

Here’s the Tip:
If you know you are going to receive a severance package, do some planning ahead of time so you can minimize your tax bill and keep more of your money.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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