Whether leaving your job is voluntary
or not you may receive a termination or severance package upon
exiting the company. If your departure is involuntary every
jurisdiction stipulates how much notice you will receive, it is
common for the company to pay you in lieu of actually having you work
through this time period.
Severance is payment in recognition of
years of service with the company. At this point only federal
jurisdiction and the province of Ontario has statutory minimum
severance requirements. In Ontario the minimum severance is one week
pay per year of service with the company. In other jurisdictions
severance amounts are based on precedence and the dollar amount will
be determined by your employment arrangement and the circumstances of
your departure.
In either case the
termination/severance pay is considered employment income and will be
taxed as such. Therefore it is important you understand your choices
when determining how and when to take your severance. Employers are
required to withhold the appropriate income taxes when paying out a
lump sum. For amounts over $15000 your employer will automatically
withhold 30%, this could be higher depending on your marginal tax
bracket. Therefore the timing of receiving your package could be
important; if you are near the end of the year you can request your
employer defer the payment until January. By deferring the payment
you will push the income into next year when your income may be
substantially lower due to your current unemployed status; and
therefore it will be taxed at a lower rate.
Retiring Allowance
A retiring allowance is normally paid
in recognition of long service or as part of payment due to
involuntary job loss. It will include severance pay and sick leave
credits, but it does not include unused vacation pay or termination
pay. The retiring allowance must be included in taxable income,
however all or a portion of it can be transferred tax free into your
RRSP providing specific requirements are met. You can transfer $2000
for every year of service prior to 1996, and an additional $1500 for
every year of service prior to 1989 when you were not part of the
company’s pension plan.
Severance Packages
Severance packages are meant to help
you though the transition period of finding new employment.
Knowing the bills will be paid reduces stress and lets you
concentrate on getting back to work. However, a severance package
may seem like a windfall if you already have a new job lined up.
Buying a new car, going on a holiday or doing some renovations might
be tempting, but you should look at the long term implications of
your decision. Provided you have contribution room; you could
transfer the money directly into your RRSP without taxes being
withheld by your former employer. If you have already maxed out your
RRSP you could top up your emergency fund or invest it into your TFSA
and have the money grow tax free.
If you find yourself in the position of
receiving a retiring allowance or severance package make sure you
speak to me, we can look at all your options and ensure the money
goes in the most tax efficient way towards something that is really
important to you.
Have a great weekend,
Tracey
Source: Dynamic Funds
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