Severance package settlement confusion: Difficulty – Canadian taxes

September 18, 2013 6:35 AM

I need some advice on how to best manage a severance package cheque I’ll be receiving in a week or so. I have room to contribute, approx. $15k or so into my RRSP (this may be understated, going from memory) Details I want to stay reasonably liquid, I’m not sure how long it will take me to find a new position and I will be living off of this settlement in the interim Is there tax benefit to contributing to my RRSP now, and withdrawing in the New Year? If I just take it all, I’m thinking I’ll get a decent tax return when I file – true/false? Is there any benefit to asking for 2 cheques, one now, one after January 1st? Total severance will be around $70k or so, gross Thanks for your help!
posted by walkinginsunshine to Work & Money (2 answers total)

IANAA, but you should really get an accountant to discuss this with. A couple things to consider:

Is there tax benefit to contributing to my RRSP now, and withdrawing in the New Year?

Probably not. When you withdraw from an RRSP the bank will withhold the anticipated tax. In essence, if you put in $100, when you withdraw it the bank will only give you $80, unless you are using the lifelong learning plan or the homebuyers plan. RRSPs work on the assumption that you put money into them at a high tax bracket and you withdraw while you're in a low tax bracket. While it's possible that you'll be in a lower tax bracket next year, especially if unemployed, I believe that it won't get sorted out until you file next year's income tax (that is, they'll withold tax at the tax bracket you were in this year, not your tax bracket in January).

If I just take it all, I’m thinking I’ll get a decent tax return when I file – true/false?

Your employer withholds tax and submits it to the government as part of the law. If you contribute to your RRSPs then your taxable income will be less, so they will have submitted more money to the government than was necessary. You receive this money back as your tax return. You'll probably get back a reasonable amount, but you're decreasing the liquidity of that money (as you can't withdraw it without the withholding tax) so it's not the best reason to make this decision.

Is there any benefit to asking for 2 cheques, one now, one after January 1st?
I don't think so, but you should talk to your accountant. This is on the slippery edge of tax avoidance as income should be connected to the timeperiod in which you earned it. I don't know if it's a problem on your side, but it might be on their side if they're using accrural accounting (which they will be doing if they're a publicly traded company).

I hope this helps, but really, you need to talk to a professional about this. A financial planner can help you pick investments to put this in, but I'd recommend an accountant for the tax advice.

Best of luck!
posted by valoius at 7:52 AM on September 18, 2013

Before you make any plans for that money, you should make sure to know whether the company has already taken out the taxes and given you the remainder, or if it's a lump sum and you will owe the taxes on it at the end of the year. That will make a HUGE difference in the amount you really get to keep.
posted by CathyG at 10:02 AM on September 18, 2013