Severance Planning

Losing your job is a stressful event. You may have been employed with your employer for many years and now you are without work. First things first; you will need some answers to a few questions. Consulting with your lawyer is prudent to help you ensure that you receive fair severance pay and answer any legal questions. You will need to determine the amount of severance pay you’ll be receiving if you do not know this already.

The longer you’ve been employed with an organization, the higher your severance package will be. It is important to ensure you hang on to as much money from your settlement as possible. Tax on severance pay can be steep. It may push you into a higher tax bracket. It is definitely a benefit to receive the severance; however, it is painful to see large portions go to the government. There may be options to help you reduce your tax bill. Northern River Financial can help review your situation and determine a tax efficient structure and minimize losses to income taxes.

Once you determine the amount of the severance, you will need to calculate how much you will need for the short term and how much you can invest for the long term. You may have to do a budget to assist with this decision. You will need to determine how much money you will need to live on before you will find new work. You will also have the opportunity to transfer your group RRSP or pension plan to your own RRSP or a LIRA. Northern River Financial can assist with the transfer. Reducing the tax on the severance is also reviewed. In some situations, there are opportunities to reduce your tax bill on the lump sum; the tax grab can be significant on the severance pay.

Tax Shelter Strategies

Registered Retirement Savings Plans (RRSP) – Assuming you have contribution room, placing your severance pay into an RRSP is an ideal investment option because of the tax advantages.

Retiring Allowance – This option allows you to shelter severance pay based on the duration of service with the company and the particular years employed. The amounts that can be transferred vary depending on the years you were employed. Due to the complexity of the calculation, we will be able to advise you on its merits.

Tax Sheltered Insurance Accounts – A tax sheltered insurance account allows you to acquire tax-free earnings within the policy. It can provide for future retirement income at a reduced tax rate and offers tax-free proceeds to your estate.

Invest into Your Own Business – If you want to invest your severance directly into a business, CRA may be looking for tax first. You can shelter the money and then withdraw funds as you need them. Your taxes will be lower because your income is lower during start-up. Before starting a new enterprise, it is important to consider the best tax planning ideas for entrepreneurs.

Key Considerations

  • Reviewing your RRSP contribution room
  • Transferring your group RRSP or pension
  • Analyzing your tax position to reduce tax on your severance
  • Consulting a lawyer to ensure your severance pay is legal and fair
  • Considering a trust or similar structure to minimize tax