February 23, 2026

Is Severance Taxed in Canada?

Taxccount

We understand how stressful it can be to lose your job, and add to it, the added stress of understanding how severance tax is paid in Canada. A lot of employees get confused and surprised to see a significant portion of their severance deducted at source, which leads to a common question: Is severance taxed in Canada?

Find out all that you need to know about severance tax in Canada through this Taxccount Canada guide. It explains how severance pay is taxed, how it differs from regular employment income, what deductions are applicable, and ways to reduce your tax liability with proper planning through tax experts.

What Is Severance Pay In Canada?

Severance pay is compensation that’s paid by an employer to an employee when the employment comes to an end. It may be provided in various circumstances –

  • Termination without cause
  • Layoffs or downsizing in the organization
  • Company restructuring
  • Business closing

Severance can be paid as a lump sum or over a period of time, and it may be required by employment standards legislation or provided through an employment contract.

Plan Your Severance Strategy

☎️ Get Help

Is Severance Taxed In Canada?

Yes, severance pay is taxable in Canada.

Severance pay is considered employment income as per the Canada Revenue Agency (CRA), which means it is subject to taxation. You also need to know that, in addition to income tax, certain payroll deductions may also be applicable, based on how the severance is structured.

How Is Severance Taxed?

It depends on how the severance pay is made. The different ways in which it can be taxed include the following –

Lump Sum Severance Payment

If severance is paid as a lump sum, then the employer is liable to withhold income tax at the source based on the CRA’s lump-sum withholding rates –

  • 10% on up to $5000
  • 20% on amounts between $5001 and $15000
  • 30% on over $15000

Keep in mind that these are withholding rates and not the final tax rates. The actual tax liability is calculated when you file your income tax return. If you need any help understanding a lump sum severance payment or need assistance in filing your tax return, get in touch with the Taxccount Canada team, and we would be happy to assist.

Salary Continuance

The other option is that the severance is paid as salary continuance (which means regular payments over a period of time). In this case, it is taxed like normal employment income. Income tax, CPP contributions, and EI premiums are deducted from each payment.

Are CPP And EI Deducted From Severance Pay?

It actually depends on the structure of the severance on whether CPP and EI apply to it.

Lump Sum Severance

  • CPP contributions may apply up to the annual maximum
  • EI is not deducted

Salary Continuance

  • Both CPP and EI are usually deducted, just like in the case of a regular paycheck

You need to understand this distinction for accurate tax planning. And if you find it too confusing, it is recommended to take professional help.

Can Severance Pay Put You In A Higher Tax Bracket?

Yes, it is possible. Since severance pay is taxable income, when you receive it as a large lump sum in one year, it can push you into a higher tax bracket. It may result in affecting your overall tax payment when you file your return, even if a significant tax amount was withheld.

How To Reduce Taxes On Severance Pay?

You’ll be happy to know that there are legal ways to reduce or defer the tax impact that severance may have on your return. Here are the most common ones –

Transfer Eligible Severance To An RRSP

You can transfer a part of your severance directly into an RRSP if it qualifies as a retiring allowance. This can be done without using your regular RRSP contribution room. It mainly applies to –

  • Severance related to service before 1996
  • Some long-term employment situations

Use The Available RRSP Contribution Room

Even if the severance pay doesn’t qualify as a retirement allowance, you can still contribute to your RRSP with the available RRSP contribution room to offset the taxable income.

Time Your Severance Strategically

You can request your employer to delay the severance payments until the following calendar year. If they agree, it potentially reduces your overall tax burden as your income will be in the lower tax bracket.

Is Severance Different From Termination Pay?

Yes, they both are slightly different under the employment law. However, in a lot of cases, they are often used interchangeably. For taxation purposes, both severance pay and termination pay are considered employment income.

How Is Severance Reported On Your Tax Return?

You will receive a T4 slip from your employer. It will indicate the severance amount and tax withheld. Once you receive it, you must report this income on your personal tax return for that year.

If your severance qualifies as a retirement allowance, then it may appear on a T4A slip instead of a T4 slip.

Common Mistakes To Avoid

  • Don’t assume severance is tax-free in Canada
  • Confusing withholding tax with the final tax liability
  • No proper planning for higher marginal tax rates
  • Not exploring RRSP transfer options

It is highly recommended that you get professional advice for proper planning, and who better than your one-stop tax consultant and specialist, Taxccount Canada. It will save time and reduce errors as well.

Speak To A Tax Expert

☎️ Get Help

This is general information only and not professional advice. Consult a professional before acting.