How is severance taxed in Canada?

A retiring allowance, which is severance for loss of employment, is fully taxable in the year you receive it, with no CPP or EI. Employers withhold at the lump-sum rates: 10% up to $5,000, 20% to $15,000 and 30% above that. In Quebec it is 5/10/15% federal plus 14% or 19% provincial. The real tax is your marginal rate, settled on your return.

Can I put my severance into an RRSP?

Yes, two ways. Years of service before 1996 give you an 'eligible' amount you can transfer without RRSP room: $2,000 per year, plus $1,500 per year before 1989 without a vested pension. Anything else can be transferred using your regular room. If the employer transfers it directly, no tax is withheld.

Is pay in lieu of notice the same as severance?

No. Wages in lieu of notice, salary continuance and unused vacation pay are employment income, with CPP and EI deducted like regular pay. Only the amount paid for loss of employment beyond the notice period is a retiring allowance.

Should I take severance as a lump sum or salary continuance?

A lump sum can go into an RRSP, using the eligible rollover plus your room, and lets you collect EI sooner once the allocation period ends. Salary continuance keeps your benefits and spreads the income over two calendar years if it straddles January, which can lower the tax. The 'half in January' line shows the tax saved by splitting. Add the value of continued benefits yourself.

Why does the withholding differ from the tax I owe?

Withholding uses flat lump-sum rates that ignore your other income. If your total income is high, the 30% withheld may be too little and you will owe more in April. If you were laid off early in the year with little income, you may get a refund.

Does severance delay my EI?

Yes. Service Canada spreads severance over the weeks after your job ends at your normal weekly pay, and EI regular benefits start after those weeks. A $40,000 package on $1,200 a week delays EI about 33 weeks. Apply for EI right away anyway so your claim is on file.

Are legal fees to get my severance deductible?

Yes. Legal fees paid to collect or establish a right to a retiring allowance or salary owed are deductible on line 23200, up to the amount of the allowance received.

How much severance am I entitled to?

That is a separate question from tax. Employment standards minimums are usually one week of pay per year of service, and Ontario adds statutory severance for large employers after five years. Common-law notice can be much more. An employment lawyer or the provincial entitlement calculators cover that. This tool covers what you keep.

Severance Pay Tax Calculator (Canada, 2026)

See what a severance package leaves in your account after withholding, and what you will really owe or get back in April. You also see how much can go into an RRSP without using your room. It checks whether splitting it across two years saves tax, and how many weeks it delays your EI. Quebec's separate withholding is built in.

Severance package

The lump sum for loss of employment (not pay in lieu of notice or vacation pay)

Province

Salary earned this year so far

Plus any other income you expect this year

Tax already taken off that salary

Optional: shows what you get back or owe in April

Amount you'll move into an RRSP

Eligible rollover for pre-1996 service ($0) plus your own room. A direct transfer avoids withholding.

EI timing, splitting across years and pre-1996 service

Your weekly pay

Estimates how long EI is delayed

Income you expect next year

For the 'pay half in January' comparison

Years of service before 1996

Of those, years before 1989 without a vested pension

Cash you get after withholding$28,000.00$12,000 is withheld at the 30% lump-sum rate on the $40,000 not transferred. The tax you really owe on it is about $12,055.

Cash now $28,000Withheld $12,000

Withheld now vs what you really owe
Severance	$40,000.00
Withheld by your employer (30%)	− $12,000.00
Cash you receive	$28,000.00
Tax the severance really adds for 2026	$12,054.84

Your RRSP plan. No pre-1996 service, so transfers use your regular RRSP room. Ask your employer to transfer it straight to the RRSP. Nothing is withheld on a direct transfer. You have until March 1, 2027 to contribute what was paid in cash. No CPP or EI comes off a retiring allowance.

Show the math

Withholding uses the CRA lump-sum rates on the amount not transferred: 10% up to $5,000, 20% up to $15,000, 30% above $15,000. The true tax is the tax on this year's income plus the severance, minus the tax on the income alone, at the 2026 Ontario brackets. So a package that pushes you into a higher bracket costs more than the withholding. The January-split line taxes half in each year at that year's income. EI: Service Canada spreads the severance over the weeks after your last day at your normal weekly pay. Benefits start after roughly severance ÷ weekly pay weeks.

Pay in lieu of notice, unused vacation and salary continuance are ordinary employment income (CPP and EI apply). Enter those in "salary earned this year", not as severance. Damages for human-rights or mental-distress claims are not taxable. Legal fees to get severance are deductible.

How this calculator works

Any amount transferred to your RRSP, the eligible pre-1996 rollover plus regular room, is taken off the taxable amount.
Withholding on the rest uses the CRA’s lump-sum rates, which depend on the size of the payment, not your income.
The actual tax is the tax on your other income plus the severance, minus the tax on the other income alone, using the 2026 federal and provincial brackets. So it reflects the brackets the severance pushes you into.
The gap between withholding and actual tax is what you get back or owe when you file.

Worked example: $40,000 severance, $60,000 of other income, $10,000 to an RRSP, Ontario

Line	Amount
Severance	$40,000.00
Transferred to RRSP	− $10,000.00
Taxable now	$30,000.00
Withholding at 30%	− $9,000.00
Cash received	$21,000.00
Actual tax on the severance	$9,045.00
Owing in April	$45.00

Assumptions

The whole package is a retiring allowance. Enter pay in lieu of notice and vacation pay as other income instead.
Withholding rates are applied to the total payment. Employers paying in instalments may withhold differently.

What to do in the first week

The order matters. EI first, then the RRSP transfer before the payment is made, then the tax planning.

Within 4 weeks of your last dayApply for EI within four weeks of your last day, even if severance delays the payments. Waiting can cost you weeks of benefits.Apply for EI regular benefits ↗
Before the package is paidBefore the severance is paid, ask the employer to transfer the eligible retiring-allowance portion or any amount within your RRSP room directly to your RRSP. Nothing is withheld on it.Retiring allowances ↗
Before signingAsk whether the package can be paid in two calendar years (a “salary continuance” or a January instalment) to spread it across two sets of brackets.
After your last dayCheck your record of employment in My Service Canada Account and that the employer coded the reason correctly.My Service Canada Account ↗
Before signingHave the agreement reviewed before signing. Provincial minimums are a floor, and common-law notice is often larger.Employment standards in Canada ↗

Common questions

Frequently asked questions

How is severance taxed in Canada?: A retiring allowance, which is severance for loss of employment, is fully taxable in the year you receive it, with no CPP or EI. Employers withhold at the lump-sum rates: 10% up to $5,000, 20% to $15,000 and 30% above that. In Quebec it is 5/10/15% federal plus 14% or 19% provincial. The real tax is your marginal rate, settled on your return.
Can I put my severance into an RRSP?: Yes, two ways. Years of service before 1996 give you an 'eligible' amount you can transfer without RRSP room: $2,000 per year, plus $1,500 per year before 1989 without a vested pension. Anything else can be transferred using your regular room. If the employer transfers it directly, no tax is withheld.
Is pay in lieu of notice the same as severance?: No. Wages in lieu of notice, salary continuance and unused vacation pay are employment income, with CPP and EI deducted like regular pay. Only the amount paid for loss of employment beyond the notice period is a retiring allowance.
Should I take severance as a lump sum or salary continuance?: A lump sum can go into an RRSP, using the eligible rollover plus your room, and lets you collect EI sooner once the allocation period ends. Salary continuance keeps your benefits and spreads the income over two calendar years if it straddles January, which can lower the tax. The 'half in January' line shows the tax saved by splitting. Add the value of continued benefits yourself.
Why does the withholding differ from the tax I owe?: Withholding uses flat lump-sum rates that ignore your other income. If your total income is high, the 30% withheld may be too little and you will owe more in April. If you were laid off early in the year with little income, you may get a refund.
Does severance delay my EI?: Yes. Service Canada spreads severance over the weeks after your job ends at your normal weekly pay, and EI regular benefits start after those weeks. A $40,000 package on $1,200 a week delays EI about 33 weeks. Apply for EI right away anyway so your claim is on file.
Are legal fees to get my severance deductible?: Yes. Legal fees paid to collect or establish a right to a retiring allowance or salary owed are deductible on line 23200, up to the amount of the allowance received.
How much severance am I entitled to?: That is a separate question from tax. Employment standards minimums are usually one week of pay per year of service, and Ontario adds statutory severance for large employers after five years. Common-law notice can be much more. An employment lawyer or the provincial entitlement calculators cover that. This tool covers what you keep.

Sources

Every figure on this page comes from one of these primary sources. Data last verified September 7, 2026.

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Data verified for tax year 2026: September 7, 2026 Updated September 7, 2026 By Nishant Malik, founder of GlassLayer

Severance Pay Tax Calculator (Canada, 2026)

How this calculator works

Worked example: $40,000 severance, $60,000 of other income, $10,000 to an RRSP, Ontario

Assumptions

What to do in the first week

Frequently asked questions

Sources

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