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Outside Quebec, an employer withholds 10% on a retiring allowance of $5,000 or less, 20% from $5,001 to $15,000 and 30% above $15,000. That’s a deposit, not the final bill. The real tax is worked out on your return at your normal rates, so a $30,000 severance cheque can leave you with a refund or a balance owing. Quebec uses lower withholding rates.
How much tax is withheld from a severance cheque?
It depends on the total retiring allowances the employer pays or expects to pay you in the calendar year, and the rate applies to the whole payment. The CRA’s table for residents of Canada outside Quebec is 10% up to $5,000, 20% for $5,001 to $15,000 and 30% for $15,001 or more. Quebec’s CRA rates are 5%, 10% and 15%, and Revenu Quebec has its own withholding on top.
CPP contributions and EI premiums aren’t withheld on a retiring allowance. The amount shows on your T4 slip, and the eligible and non-eligible portions of a rollover get separate codes (66 and 67). This is current as of October 2026.
What is the real tax at filing time?
Whatever your marginal rates make it once the allowance is added to the rest of your income. Say an Ontario employee earns $60,000 a year, is laid off on 30 June 2026 and gets six months of severance, $30,000, in one cheque. Wages for the year come to $30,000, so total income is $60,000.
| 2026 estimate | Amount |
|---|---|
| Tax withheld on the $30,000 cheque (30%) | $9,000 |
| Extra federal and Ontario tax the severance causes | $6,333 |
| Over-withheld, returned as part of the refund | $2,667 |
In the spring the extra withholding comes back as part of your refund. The estimate uses the site’s engine with basic credits plus CPP and EI credits on the wages, and no other deductions. The marginal rate in that range is about 29.65%, but the lower brackets and credits pull the average down. It can go the other way for someone with a high salary and a big allowance, because 30% withholding can fall well short of their marginal rate.
Is pay in lieu of notice taxed the same way?
No. The CRA says wages in lieu of termination notice aren’t retiring allowances. They’re employment income, and CPP and EI come off them like any pay cheque. A retiring allowance is a payment for loss of employment or long service, such as severance beyond what the law requires.
Many settlements mix the two, so ask your employer’s payroll team how the cheque is split. The severance pay calculator shows the legal minimum for your province, and our upcoming article on quitting, layoffs and EI covers the benefits side. Severance can also affect EI benefits, and temporary rules that keep separation pay out of the claim run to October 2027 under a regulation published in the Canada Gazette on 7 October 2026, so check the current treatment on the Service Canada: EI and the various types of earnings page.
Can I roll a retiring allowance into my RRSP?
Only if you worked for the employer before 1996. The eligible amount is $2,000 for each year or part-year of service before 1996, plus $1,500 for each year or part-year before 1989 in which no employer pension or DPSP benefit had vested. The CRA’s example of 10 years before 1996 and 3 before 1989 gives $24,500.
The money has to go straight from the employer into your own RRSP or RPP, in the year you get it or in the first 60 days of the next, and no tax is withheld on that portion. If you were hired in 1996 or later you have no pre-1996 service, so for most readers this rule won’t apply. An ordinary RRSP contribution still works if you have room. In the example, a $15,000 contribution cuts the 2026 tax by about $3,326. The rules are on the Canada Revenue Agency: transfer of a retiring allowance page, and our RRSP calculator shows the deduction.
Should I take severance as a lump sum or in instalments?
Instalments that cross 31 December can lower the total tax, if the agreement allows them. The allowance is taxed in the year you receive it, so spreading it over two years can keep each year in a lower bracket. Withholding changes too: $15,000 paid in December and $15,000 in January is 20% on each, or $3,000 twice, against $9,000 on a single $30,000.
The table adds up federal and Ontario tax over 2026 and 2027, assuming the person earns $15,000 in 2027 from a new job. I used 2026 rates for both years, since 2027 federal brackets aren’t published yet.
| Option | Total tax, 2026 plus 2027 |
|---|---|
| One lump sum in 2026 | $8,840 |
| $15,000 in December, $15,000 in January | $8,128 |
| Lump sum in 2026 plus a $15,000 RRSP contribution | $5,514 |
The instalment saves $712 here. If the person has no 2027 income at all, it saves $3,224. The RRSP route saves more tax now, though the $15,000 gets taxed later when it comes out. You may not get to choose the payment dates, and your employer or lawyer should confirm any change in writing.
Before you sign a separation agreement, get answers to these:
- How much of the payment is pay in lieu of notice and how much is a retiring allowance?
- Can part of it be paid in January, and will the agreement say so?
- Does my service before 1996 qualify for a direct RRSP transfer?
- When will each payment be made, and what will be withheld?
You can compare scenarios in the income tax calculator. File the 2026 return by 30 April 2027, and look at the retiring allowance box on your T4.
Where does this information come from?
The withholding rates, the pay in lieu of notice rule and the rollover amounts come from the CRA’s retiring allowance pages; the dollar examples are estimates from this site’s own engine for an Ontario employee and are not a substitute for your own return. Checked in October 2026. This is an independent information site: we provide no services, we do not represent the CRA or any organization, and we do not guarantee that anything here is accurate or current. We accept no liability for decisions based on it. Check the official source before you rely on it. See the full disclaimer.
Frequently asked questions
Is severance pay taxed more than regular income?
It's taxed at the same rates as the rest of your income, but employers withhold 10%, 20% or 30% on a retiring allowance, which can be more than your regular withholding. At filing the allowance is added to your income, so the difference comes back as a refund or goes toward a bill.
Do CPP and EI come off a retiring allowance?
No. The CRA says CPP contributions and EI premiums aren't withheld on a retiring allowance. Pay in lieu of termination notice is different: it's employment income, so CPP and EI apply to it like regular pay.
Does the $15,000 line mean 20% or 30%?
A total of exactly $15,000 falls in the 20% group, which runs from $5,001 to $15,000. At $15,001 or more the rate is 30% on the whole payment, including the first $15,000. The rate is based on the total paid or expected in the calendar year.
Can I ask my employer to split the payment over two years?
You can ask, but the employer has to agree. A split across 31 December puts part of the income in the next tax year and withholds at a lower rate on each piece. In the Ontario example the split saved about $712. Get any change in writing before it's paid.
What if I live in Quebec?
CRA withholding is 5%, 10% and 15% in the same three bands, and Revenu Quebec has its own withholding on top. Check with Revenu Quebec and your payroll department for the exact amounts, because the totals differ from the outside-Quebec figures in this article.