Severance Pay Taxes in Canada: Lump Sums, Withholding, and RRSP Room
The hub is the tax-aware income guide. A payment that is still wages, or a bonus for work you did, is bonus tax, and CPP and EI apply. Employment insurance after a job ends is the EI guide. RRSP room for the non-eligible portion is the limits table and the RRSP playbook.
- A retiring allowance includes amounts for loss of office or employment, unused sick leave, and certain damages. CRA's special-payments chart says it is not subject to CPP or EI. Income tax is withheld.
- The 10/20/30 rates are withholding. Quebec's federal portion of those rates is 5%, 10%, and 15%. Provincial Quebec withholding is Revenu Québec's.
- The eligible transfer is $2,000 for each year or part-year of service before 1996, plus $1,500 for each year or part-year before 1989 in which employer pension or DPSP contributions were not vested.
- That eligible transfer goes to your own RRSP, RPP, SPP, or PRPP. It does not go to a spousal RRSP. It does not use regular RRSP room.
- Service in 1996 and later does not earn the $2,000. Amounts above the eligible limit need ordinary RRSP room if you want them inside an RRSP.
What counts as a retiring allowance?
CRA describes a retiring allowance as an amount paid on or after retirement from an office or employment in recognition of long service, or as damages for loss of office or employment. Unused sick-leave credits are included. A payment can be part retiring allowance and part something else. CRA's payroll page says that if a lump sum includes wages in lieu of termination notice and damages, the portions follow their own character, and if there is no breakdown the full amount is generally a retiring allowance. Ask for the breakdown before you assume the whole cheque can move to an RRSP.
The special-payments chart lists retiring allowances, also called severance, as no for CPP, no for EI, and yes for tax. A salary continuance that is still employment income is not automatically in this bucket. If the payment is wages, the bonus article and a T4 are the closer fit, and EI may be affected differently. This page does not quote EI entitlement rules.
How much tax is withheld if you take the cash?
CRA's page on payments of retiring allowances tells the employer to withhold on the portion paid directly to the employee, not on the portion transferred directly to an RPP or RRSP. For a resident of Canada the rates on the year's retiring allowances are 10% at $5,000 or less, 20% from $5,001 to $15,000, and 30% at $15,001 or more. In Quebec those percentages are the federal portion only, at 5%, 10%, and 15%, and the employer still has provincial withholding. Instalments of a retiring allowance are added together for the year to pick the rate. A non-resident is generally subject to 25% Part XIII tax unless a treaty reduces it. This article does not quote treaty reductions.
The year's retiring allowance is over $15,000, so the withholding rate on the direct payment is 30%. Withholding is $12,000. That is not the tax you owe. If you have little other income, 30% can be more than the brackets will charge, and you get some back when you file. If you also have a large salary in the same year, 30% can be less than your marginal rate, and you will owe more. The salary worksheet is the province table. Add the retiring allowance to your other taxable income. Do not stop at the withholding.
What can move to an RRSP without using room?
The eligible part is set out on CRA's transfer page and in Income Tax Folio S2-F1-C2. It is $2,000 for each year or part-year before 1996 with the employer, or a related employer, plus an additional $1,500 for each year or part-year before 1989 of that employment in which no employer pension or DPSP contribution vested in you. Part-years count. The folio says the transfer is made in the year you receive the allowance or in the first 60 days of the next year, and it cannot exceed the retiring allowance included in your income.
You can transfer that eligible part to your own RPP, SPP, RRSP, or PRPP. You cannot transfer the eligible part to a spouse's or common-law partner's RRSP. CRA is explicit that the $2,000-per-year transfer is not available for 1996 and later years of service. Someone hired in 2005 has no eligible portion from that job. Someone with service in 1990 through 1995 has a limited one. Legal wording in a severance letter does not create pre-1996 years.
| Portion | Where it can go | Uses RRSP room? | Withholding if transferred directly |
|---|---|---|---|
| Eligible: the $2,000 / $1,500 formula for years before 1996 | Your own RRSP, RPP, SPP, or PRPP. Not a spousal RRSP. | No | No income tax withheld on the direct transfer |
| Non-eligible: 1996 and later service, or amounts above the formula | Your RRSP or a spousal RRSP, if you can deduct it | Yes | Employer can skip withholding if they have reasonable grounds you can deduct the contribution |
| Cash in your account | You can still contribute later, inside the deadlines | Eligible portion: no. The rest: yes. | Withholding already happened on the cash. The deduction is claimed on the return. |
Table as of October 2026. Sources: CRA, transferring the eligible part of a retiring allowance, and CRA, transfer of a retiring allowance. The 2026 RRSP dollar limit of $33,810 caps ordinary room. It does not cap the eligible transfer.
CRA says to include the full retiring allowance in income. The transferred amount is the deduction, reported on Schedule 7. A direct transfer is not "tax-free money that never appears." If you omit the income and also miss the deduction, the assessment is a mess. Keep the T4 or T4A and the RRSP receipt.
What should you decide before you sign?
- Get the years of service in writing, including part-years, and whether any pre-1989 pension amounts vested. The eligible formula is useless without the dates.
- Separate pay in lieu, bonuses, and damages if the employer will break them out. They are not all retiring allowances.
- Decide the direct transfer before the deposit. Withholding applies to cash. A later RRSP contribution gets the deduction, but the cash was already reduced.
- Check ordinary room before you promise to shelter the non-eligible balance. The dollar limit is not your room.
- Ask what happens to benefits and to EI. This page does not calculate EI. A continuation of salary can interact with EI differently than a lump sum. Read the EI guide and the record of employment.
Frequently asked questions
Is all severance taxed at 30%?
Thirty percent is the withholding rate when the year's retiring allowances paid to you exceed $15,000, outside the Quebec federal scale. It is not a flat tax. Your return taxes the amount at whatever brackets your total income falls into, in your province of residence on December 31. You may owe more or get some back.
I started work in 2010. Can I roll the severance into an RRSP with no room?
Not under the eligible-transfer formula. That formula stops at years before 1996. You can contribute to an RRSP up to your ordinary deduction limit, including a direct transfer of the non-eligible portion if the employer will do it and you can deduct it. No pre-1996 service means no $2,000-per-year addition.
Can my spouse's RRSP receive the eligible part?
No. CRA says the eligible part goes to your own plan. A spousal contribution is possible only for amounts that fit inside your ordinary RRSP deduction limit, which is the non-eligible path.
Do I pay CPP and EI on the severance?
Not on a retiring allowance, according to CRA's special-payments chart. If part of the package is wages or a bonus, that part is different. Look at the slips. A T4 box for employment income and a T4A for a retiring allowance are telling you they are not the same payment.
What if I am a non-resident when it is paid?
CRA generally applies 25% Part XIII withholding, and a tax treaty may reduce it. This page does not list treaty rates. If you left Canada in the same year, residency and departure tax are separate questions. Get advice before you rely on the resident 10/20/30 scale.
Sources
- CRA: payments of retiring allowances
- CRA: transferring the eligible part
- CRA: Income Tax Folio S2-F1-C2, Retiring Allowances
- CRA: special payments chart
- CRA: 2026 RRSP dollar limit
Withholding is a deposit. The eligible years are a formula.
Room, slips, and the year of payment decide the bill. The 2026 tax guide walks the return side.
Get the 2026 Tax Guide — $49 CAD
