Severance Pay Tax Calculator: how it works in 2026, with a worked example

Questions people ask

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.