The short answer
Severance pay is taxable income. The CRA calls it a retiring allowance. Your employer withholds tax at flat lump-sum rates when it pays you, and the final tax is settled on your return for the year.
Lump-sum withholding (outside Quebec)
| Size of the payment | Tax withheld |
|---|---|
| Up to $5,000 | 10% |
| $5,000.01 – $15,000 | 20% |
| Over $15,000 | 30% |
Quebec: 5% federal + provincial withholding at its own rates.
Example
18 years and 8 months of service at $1,800 a week: severance pay of 18.67 weeks = $33,600.00. Withholding at 30% = $10,080, so you receive about $23,520 in hand. Termination pay ($14,400.00) is taxed like normal pay.
Will I owe more at tax time?
Possibly. If the severance pushes your income for the year into a higher bracket, your marginal rate may be above 30% and you may owe a balance in April. If you are out of work for most of the year, you may get some back instead. Our salary pages show the marginal rate for your income and province.
Using your RRSP
- You can contribute severance to your RRSP within your normal RRSP room and deduct it. If your employer pays it straight into your RRSP, they withhold no tax on that part.
- An extra rollover of up to $2,000 per year of service before 1996 (plus $1,500 per pre-1989 year without a pension) is allowed on top of your room — only for older service.
Other things to know
- Severance is not CPP- or EI-pensionable, but it can delay when EI benefits start.
- Ask for the payment to be split across two calendar years if that keeps you in a lower bracket — many employers agree.
- Legal fees you pay to collect severance are generally deductible.
Quick reference: your rights when you are let go in Ontario
- Notice or pay: 1 week after 3 months, 2 weeks after 1 year, then 1 week per year up to 8.
- Severance pay: 1 week per year (with partial years) up to 26, after 5 years at an employer with a $2.5M+ payroll.
- Vacation pay owing must be paid out; benefits continue during the statutory notice period.
- Record of Employment within 5 calendar days of the interruption of earnings.
- Deadline to complain: a claim with the Ministry of Labour must generally be filed within two years.
When the ESA does not apply
Federally regulated workplaces (banks, airlines, telecoms, interprovincial transport) follow the Canada Labour Code instead, with different notice and severance rules. Some workers are excluded from parts of the ESA, for example certain construction employees and people on temporary layoff that has not yet become a termination.
Before you sign
A severance offer usually comes with a release. Signing it normally ends your right to claim more. Take the time you are given, compare the offer with the ESA minimum on this page and, if the gap to common-law notice could be large, consider a short consultation with an employment lawyer. Many work on contingency for wrongful dismissal claims.
Rules checked on 5 November 2026 against the Employment Standards Act, 2000.
FAQ
Is severance pay taxable in Canada?
Yes. It is a retiring allowance, taxed as income in the year you receive it.
How much tax is withheld from severance pay?
10% on lump sums up to $5,000, 20% from $5,000 to $15,000 and 30% above $15,000 (outside Quebec). Your actual tax is calculated on your return.
Can I put my severance into my RRSP tax-free?
Yes, up to your available RRSP room (plus special room for service before 1996). Paid directly into your RRSP, no tax is withheld on that amount.
Sources (checked 5 November 2026): Employment Standards Act, 2000 (Ontario), ss. 54–57 (notice of termination: 1 to 8 weeks) and ss. 63–66 (severance pay: 5 years, $2.5 million payroll, 1 week per year to 26 weeks); Ontario Ministry of Labour “Your guide to the Employment Standards Act”; Employment Hero, “Ontario severance pay guide: 2026 rules”; CRA T4001 Employers’ Guide (lump-sum withholding 10% / 20% / 30% outside Quebec). CRA, “Retiring allowances” (Income Tax Act s. 60(j.1)).