How is severance taxed in Canada?

A retiring allowance (severance for loss of employment) is fully taxable income 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, 30% above (Quebec: 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 ($2,000 per year, plus $1,500 per year before 1989 without a vested pension) that can be transferred without RRSP room. Anything else can be transferred using your regular room. Transfers made directly by the employer avoid withholding.

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 be rolled into an RRSP and lets you collect EI sooner once the allocation period ends; salary continuance keeps benefits and spreads tax over two years if it straddles December. The tax difference depends on which year has less other income.

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 affect EI?

Yes. Service Canada allocates severance to the weeks after your job ends, delaying the start of EI benefits by the number of weeks the severance represents.

Lump sum or salary continuance: which is better for tax?

A lump sum can be transferred to an RRSP (eligible rollover plus your room) and lets EI start once the allocation period ends; salary continuance keeps benefits and spreads the income over two calendar years if it straddles January, which can lower the tax. The calculator's 'half in January' line shows the tax saved by splitting; add the value of continued benefits yourself.

Does severance delay my EI?

Yes. Service Canada allocates severance to 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. Minimums under employment standards are usually one week of pay per year of service (Ontario adds statutory severance for large employers after five years), but common-law notice can be much more. The provincial ministries' entitlement calculators and an employment lawyer 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, what you will really owe or get back in April, how much can go into an RRSP without touching your room, whether splitting it across two years saves tax, and how many weeks it delays your EI. Quebec's separate withholding is built in.

Lands in your account after tax is withheld$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 truly owe
Severance	$40,000.00
Withheld by your employer (30%)	− $12,000.00
Cash you receive	$28,000.00
Income tax the severance really adds to your 2026 return	$12,054.84

Your RRSP plan. No pre-1996 service, so transfers use your regular RRSP room. Ask the employer to transfer directly to the RRSP: nothing is withheld on a direct transfer, and you have until 2027-03-01 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. True tax = tax on this year's income plus the severance minus tax on the income alone, with 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 allocates severance to the weeks after your last day at your normal weekly pay, so 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.

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 (severance for loss of employment) is fully taxable income 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, 30% above (Quebec: 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 ($2,000 per year, plus $1,500 per year before 1989 without a vested pension) that can be transferred without RRSP room. Anything else can be transferred using your regular room. Transfers made directly by the employer avoid withholding.
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 be rolled into an RRSP and lets you collect EI sooner once the allocation period ends; salary continuance keeps benefits and spreads tax over two years if it straddles December. The tax difference depends on which year has less other income.
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 affect EI?: Yes. Service Canada allocates severance to the weeks after your job ends, delaying the start of EI benefits by the number of weeks the severance represents.
Lump sum or salary continuance: which is better for tax?: A lump sum can be transferred to an RRSP (eligible rollover plus your room) and lets EI start once the allocation period ends; salary continuance keeps benefits and spreads the income over two calendar years if it straddles January, which can lower the tax. The calculator's 'half in January' line shows the tax saved by splitting; add the value of continued benefits yourself.
Does severance delay my EI?: Yes. Service Canada allocates severance to 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. Minimums under employment standards are usually one week of pay per year of service (Ontario adds statutory severance for large employers after five years), but common-law notice can be much more. The provincial ministries' entitlement calculators and an employment lawyer cover that; this tool covers what you keep.

Full guide: how it works, a worked example, every rule and every source Read the guide →

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