Is Severance Taxable in Ontario? How Your Payout Is Taxed
Severance is taxable income, but how it is paid changes how much tax comes off and when. Here is how severance is taxed in Ontario and how to keep more of it.
Key takeaways
- Severance is taxable income, whether paid as a lump sum or salary continuance.
- Lump-sum withholding (outside Quebec) is 10% / 20% / 30% by amount.
- Withholding is not your final tax; your year-end marginal rate decides that.
- Transferring severance to an RRSP can defer tax if you have contribution room.
- This is general information, not tax advice, so confirm with a tax professional.
In this article
A severance offer always looks bigger than what lands in your account, because it is taxable. How it is paid, as a single lump sum or spread out as salary continuance, changes how much tax comes off up front and when you ultimately pay it. Here is how severance is taxed in Ontario and where you may be able to keep more of it. This is general information, not tax advice, so run the specifics past an accountant.
✅Quick answer. Severance is taxable income. If it is paid as a lump sum, your employer withholds tax at set lump-sum rates (outside Quebec: 10% on amounts up to $5,000, 20% on $5,000 to $15,000, and 30% over $15,000). If it is paid as salary continuance, it is taxed like a regular paycheque. That withholding is only an estimate. Your actual tax depends on your total income and marginal rate for the year. You may be able to transfer some of a lump sum into an RRSP to defer tax if you have contribution room.
Why is severance taxed at all?
Severance is treated as income, either as employment income or as a retiring allowance, depending on how it is structured. Either way, it is taxable and reported for the year you receive it. The tax is not a penalty for the payment being severance; it is the same reason your salary is taxed. What matters for planning is the timing and the withholding.
Lump-sum withholding rates
When severance is paid as a single lump sum, employers apply flat lump-sum withholding rates (outside Quebec):
| Lump-sum amount | Withholding rate |
|---|---|
| Up to $5,000 | 10% |
| Over $5,000 up to $15,000 | 20% |
| Over $15,000 | 30% |
This is only what is held back at source. Because a large severance can push your income for the year into a higher bracket, your final tax bill when you file can be higher than the amount withheld, or lower if you were out of work for part of the year. Do not treat the withheld amount as the last word.
Can I shelter severance in an RRSP?
Often, yes, at least in part. If you have available RRSP contribution room, you can direct some of a lump-sum severance into an RRSP, which defers the tax until you withdraw it later, ideally in a lower-income year. In some cases, a narrow portion tied to years of service before 1996 (an eligible retiring allowance) can be transferred to an RRSP without using contribution room, but that is a legacy rule that applies to fewer and fewer people. A tax advisor can tell you what applies to you.
Lump sum versus salary continuance, for tax
If severance is paid as salary continuance rather than a lump sum, it is taxed like ordinary employment income as you receive each payment, which can spread the tax over two calendar years and soften the bracket impact. Which structure is better for you depends on your situation, and it is one of the trade-offs we cover in lump sum versus salary continuance.
What should you do before accepting a payout?
- 1.Look at whether the offer is lump sum or salary continuance and note the withholding.
- 2.Check your RRSP contribution room to see how much tax you could defer.
- 3.Consider the timing across calendar years if you can influence when you are paid.
- 4.Get the legal amount reviewed first, because maximizing the severance itself matters more than the tax split.
Tax is the second question. The first is whether the offer is fair to begin with. Most employees are owed more than the first number, so start with a severance review, then plan the tax. See also how much severance you are really owed.
Frequently asked questions
Do I pay tax on severance in Ontario?
Yes. Severance is taxable income whether it is paid as a lump sum or as salary continuance. It is reported for the year you receive it, and the tax depends on your total income and marginal rate for that year.
How much tax is withheld from a lump-sum severance?
Outside Quebec, employers withhold at flat lump-sum rates: 10% on amounts up to $5,000, 20% on amounts over $5,000 up to $15,000, and 30% on amounts over $15,000. That is only withholding, not your final tax.
Can I put severance into an RRSP to reduce tax?
Often yes, if you have RRSP contribution room, which defers the tax until you withdraw later. A narrow portion tied to pre-1996 service may transfer without using room, but that is a legacy rule. Confirm the details with a tax advisor.
Is a lump sum or salary continuance better for tax?
Salary continuance can spread the income and tax over more than one calendar year, softening the bracket impact, while a lump sum is taxed in one year but gives certainty and RRSP options. The best choice depends on your situation.
Priya Sharma
Legal Writer, Mirza Law
Priya Sharma is a legal writer at Mirza Law in Toronto. She writes about wrongful dismissal, workplace rights, and what Ontario employees can do when they are treated unfairly.
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