Year-End Tips for Taxpayers with Severance Packages

Have you or any of your clients received a pink slip or early retirement package? There is some tax planning to consider doing before saying farewell to the world of work.

Whenever possible, avoid adding a lump sum of retirement income in one tax year. A better strategy is to arrange to take a termination payment or severance package over two tax years; for example, consider taking part of it in December and part in January. That will often bring a better tax result.

If your only option is to accept a lump sum, check out your RRSP contribution room and contribute as much of your severance to your RRSP as possible. This will offset taxes owing on the severance in the current tax year. You’ll get to keep more money, earn investment income on a tax-deferred basis and reserve for yourself the opportunity to time RRSP withdrawals in the future to get a better tax result as a family. There may even be an opportunity to split RRSP withdrawals with your spouse in the future.

You may receive an “eligible” retiring allowance or an “ineligible” allowance, and this will show up on your T4 slip. Tax planning opportunities include the following:

Eligible Allowances. The portion of your retiring allowance that is “eligible” can be transferred into your RRSP, even if you don’t have any contribution room. The effect of such a transfer is that you won’t have to pay taxes on that portion of the retiring allowance until you take that money out of your RRSP.

Ineligible Allowances. The portion of your retiring allowance that is “ineligible” can also be transferred to your RRSP, but only if you have enough contribution room to accommodate the contribution.

Once RRSP contribution opportunities are exhausted, consider topping up your TFSA if there is room; that will also have the effect of reducing the overall tax impact for the family.

Additional Educational resource: Tax Efficient Retirement Income Planning course, Elements of Real Wealth Management course.

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