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Your
Money Matters
March
2009 Issue
Severance Packages Have Major Tax
Issues
Every
recession brings with it job losses. If this applies to you, there
are decisions that must be made to ease both immediate and long-term
financial burdens.
There
may be compensation as a result of your job loss, generally in the
form of a retiring allowance. If severance is a one-time payment or
a fixed amount payable over a short period with respect to loss of
employment, or after retirement in recognition of long service
(without continuation of employment benefits), it’s considered a
retiring allowance.
Retiring
allowances are fully taxable in the year received. However, a
portion may be eligible for transfer to the recipient’s RRSP,
resulting in a deferral of tax on the amount transferred. The
severance amount eligible for transfer to an RRSP is limited to
$2000 per year of service with the employer, or a related employer
before 1996, plus $1500 for each year of service before 1989 for
which employer contributions to an RPP or DPSP have not vested. The
employer computes the amount eligible for transfer and reports it on
a T4A slip.
To
reduce the tax bite of a large severance package – if the retiring
allowance is greater than the portion eligible for RRSP transfer,
and if the individual has other unused contribution room – he or she
might consider using some of the ineligible retiring allowance
amount to fund RRSP contributions. An employee might attempt to
negotiate receiving the payment in installments over more than one
year. This provides access to the lower marginal tax rates in the
subsequent year, but it also means the person won’t have access to
the funds until that time.
Finally,
if an employee incurs legal fees to secure a severance, these fees
are deductible, but only against the severance or termination
payment reported, net of amounts transferred to an RRSP. Due to the
options, and consequences involved, it is best that you speak with
an investment professional to ensure your choices are right for your
circumstances.
Theresa Wever and the Money
Concepts Team.
Commissions, trailing commissions, management fees and expenses all
may be associated with mutual fund investments. Please read the
prospectus before investing. Mutual funds are not guaranteed, their
values change frequently and past performance may not be repeated.. |
