Key Takeaways
- 1.A $60,000 severance classified as a retiring allowance is exempt from CPP and EI deductions — saving you roughly $5,100 compared to regular employment income.
- 2.Your employer withholds $16,000 (26.67%) at source on the $60K lump sum using the graduated withholding rates for amounts over $15,000.
- 3.With all service after 1995, the pre-1996 eligible RRSP transfer is $0 — the entire $60,000 is non-eligible retiring allowance taxed as income.
- 4.The $60K severance pushes your 2025 income to $145,000, hitting the 33.89% combined marginal rate in Ontario — splitting across two tax years can save $1,500–$2,500.
- 5.After federal tax, Ontario tax, and the Ontario surtax, your estimated net after-tax cash from the $60K severance is approximately $41,500–$43,000.
How CRA Classifies Your Severance: Retiring Allowance vs. Regular Income
The first question is not how much tax you owe — it is how the Canada Revenue Agency classifies your $60,000 payment. This classification determines CPP/EI treatment, withholding rates, RRSP transfer eligibility, and which T4 boxes the amount lands in.
Under section 248(1) of the Income Tax Act, a retiring allowance is an amount received on or after retirement from an office or employment in recognition of long service, or as compensation for loss of employment. Most lump-sum severance packages paid on termination — including statutory severance, common-law reasonable notice damages, and negotiated settlements — qualify as retiring allowances.
The distinction matters because retiring allowances get favourable treatment: they are exempt from CPP contributions and EI premiums. Regular employment income (like pay in lieu of notice that is tied to a specific notice period) is not exempt. In our scenario, we assume the full $60,000 is classified as a retiring allowance, which is the most common treatment for a negotiated severance package. For a broader look at Ontario income tax at various salary levels, see our Ontario income tax take-home calculator.
The Pre-1996 Eligible Service RRSP Transfer Rule
One of the most misunderstood provisions in severance tax planning is the eligible-service RRSP transfer. If you have years of service before 1996, you can transfer a portion of your retiring allowance directly to your RRSP without using your regular contribution room:
Pre-1996 service: $2,000 per year of eligible service
Pre-1989 service (no employer pension/DPSP): Additional $1,500 per year
Our scenario: Employment from January 2010 to December 2024 = 15 years
All service is post-1995 → Eligible RRSP transfer = $0
This means the entire $60,000 retiring allowance is the “non-eligible” portion. It will appear in T4 box 67, and box 66 will show $0. The non-eligible portion is taxable as income in the year received. You can still contribute the severance to your RRSP using your regular contribution room, but that room must already exist on your Notice of Assessment.
For employees who started before 1996, this rule can shelter significant amounts. An employee with 10 years of pre-1996 service and no employer pension could transfer up to $35,000 ($2,000 × 10 + $1,500 × 10) directly to an RRSP, tax-free, without touching their regular room.
Your Ontario Tax Profile: $85K Salary + $60K Severance
With the full $60,000 taxed in 2025, your total income for the year is $145,000. Let's walk through the combined federal and Ontario tax brackets:
| Level | Rate | Bracket Range |
|---|---|---|
| Federal (on $85K–$115,717) | 20.5% | $57,375 – $115,717 |
| Federal (on $115,717–$145K) | 26.0% | $115,717 – $160,698 |
| Ontario (on $85K–$102,894) | 9.15% | $57,375 – $102,894 |
| Ontario (on $102,894–$145K) | 11.16% | $102,894 – $150,000 |
| Top combined marginal rate at $145K | 37.16% | Federal 26% + Ontario 11.16% |
At $145,000 total income, your top marginal rate is 37.16% (26% federal + 11.16% Ontario). Without the severance, at $85,000 your combined marginal rate was 29.65% (20.5% federal + 9.15% Ontario). The severance pushes approximately $29,000 into higher brackets.
Worked Example: Tax on the $60,000 Severance
Here is the incremental tax created by adding $60,000 of retiring allowance income on top of your $85,000 salary:
Federal incremental tax:
$85,000 → $115,717 at 20.5% = $30,717 × 0.205 = $6,297
$115,717 → $145,000 at 26.0% = $29,283 × 0.26 = $7,614
Federal subtotal: $13,911
Ontario incremental tax:
$85,000 → $102,894 at 9.15% = $17,894 × 0.0915 = $1,637
$102,894 → $145,000 at 11.16% = $42,106 × 0.1116 = $4,699
Ontario subtotal: $6,336
Total incremental tax on $60,000 severance: ~$20,247
Effective tax rate on severance: ~33.7%
Note this is the incremental tax attributable to the severance alone, not your total tax bill for the year. The effective rate of 33.7% on the severance is higher than the 29.65% marginal rate you were accustomed to on your salary because the lump sum pushes income into higher brackets. For a comparison of tax rates at different salary levels, see our Alberta vs. Ontario income tax comparison.
Ontario Surtax: The Hidden Layer
Ontario adds a surtax on top of its basic provincial tax. This is often missed in back-of-envelope severance calculations:
Ontario surtax rates:
20% of basic Ontario tax exceeding $5,315
36% of basic Ontario tax exceeding $6,802
At $145,000 income, your basic Ontario tax is approximately $10,100.
Surtax layer 1: ($10,100 − $5,315) × 20% = $957
Surtax layer 2: ($10,100 − $6,802) × 36% = $1,187
Total Ontario surtax: approximately $2,144
The surtax effectively increases Ontario's marginal rates by 20–56% at income levels above about $90,000. On the severance portion specifically, the surtax adds roughly $1,200–$1,500 compared to what you would have owed at $85,000 salary alone. This makes the Ontario surtax one of the strongest arguments for splitting the severance across two tax years.
Withholding at Source: What Your Employer Deducts
Your employer is required to withhold tax on lump-sum payments including retiring allowances. The withholding rates for Canadian residents (outside Quebec) are:
| Payment Amount | Withholding Rate |
|---|---|
| Up to $5,000 | 10% |
| $5,001 to $15,000 | 20% |
| Over $15,000 | 30% |
Withholding on $60,000:
First $5,000 × 10% = $500
Next $10,000 × 20% = $2,000
Remaining $45,000 × 30% = $13,500
Total withheld: $16,000 (26.67% effective rate)
Cash received at time of payment: $60,000 − $16,000 = $44,000
The withholding is a prepayment of tax, not a final amount. When you file your 2025 return, the actual tax on the $60,000 severance is approximately $20,250–$21,500 (including the Ontario surtax). Since only $16,000 was withheld, you will owe roughly $4,250–$5,500 when you file. Budget for this shortfall.
Net After-Tax Cash: What You Actually Keep
Pulling all the numbers together for the $60,000 severance paid in full in 2025:
| Item | Amount |
|---|---|
| Gross severance | $60,000 |
| Federal tax (incremental) | ($13,911) |
| Ontario basic tax (incremental) | ($6,336) |
| Ontario surtax (incremental) | ~($1,500) |
| CPP/EI on retiring allowance | $0 |
| Net after-tax cash | ~$38,253 |
| Effective tax rate on severance | ~36.2% |
Estimates include the Ontario surtax. Actual amounts will vary based on your complete tax situation, other income, credits, and deductions. The CPP/EI exemption on the retiring allowance saves you approximately $5,100 that you would have owed if the payment had been classified as regular employment income.
Strategy 1: RRSP Contribution With Regular Room
Even though the pre-1996 eligible RRSP transfer is $0 in this scenario, you can still use your regular RRSP contribution room to shelter some of the severance. At $85,000 in prior-year earned income, your 2025 RRSP room is approximately $15,300 (18% of $85,000). If you have unused room carried forward from prior years, the available room could be significantly higher.
Example: $15,300 RRSP contribution from severance
Tax saved at ~37% blended marginal rate: approximately $5,660
Net cost of sheltering $15,300: $15,300 − $5,660 = $9,640
Revised taxable income: $145,000 − $15,300 = $129,700
The RRSP contribution pulls your income back below the 26% federal bracket threshold, reducing both the marginal rate on the top slice and the Ontario surtax. This is the single most effective tax reduction tool available for a post-1995 employee receiving a severance. For a deeper look at RRSP vs. TFSA at comparable income, see our RRSP vs. TFSA comparison for Ontario.
Strategy 2: Splitting Across Two Tax Years
If your employer agrees to pay the severance in two instalments — $30,000 in December 2025 and $30,000 in January 2026 — the tax picture changes significantly:
| Scenario | Full in 2025 | Split 50/50 |
|---|---|---|
| 2025 total income | $145,000 | $115,000 |
| 2025 top marginal rate | 37.16% | 29.65% |
| 2026 income (severance only) | $0 | $30,000 + new job |
| Estimated tax savings from split | — | $1,500–$2,500 |
The split keeps both years below the 26% federal bracket and reduces the Ontario surtax. The exact savings depend on your 2026 employment income. If you start a new job quickly at a similar salary, the 2026 portion may land in a similar bracket anyway. The split is most valuable if you expect reduced income in 2026. For strategies on managing CRA instalments during income transitions, see our CRA quarterly instalment calculator.
T4 Reporting: Box 66 and Box 67 Explained
Your employer will issue a T4 slip with the retiring allowance reported as follows:
Box 14 (Employment income): $85,000 (salary) + $60,000 (retiring allowance) = $145,000
Box 16 (CPP pensionable earnings): $85,000 (salary only)
Box 24 (EI insurable earnings): $85,000 (salary only)
Box 66 (Eligible retiring allowance): $0 (no pre-1996 service)
Box 67 (Non-eligible retiring allowance): $60,000
Box 22 (Income tax deducted): Includes the $16,000 withheld on the retiring allowance
When you file, the box 67 amount is included in your total income on line 13000 (other income) or line 10400 (other employment income), depending on how your tax software categorizes it. The key point: you do not get a special deduction for the box 67 amount unless you contribute it to an RRSP using available room. For tips on optimizing year-end RRSP contributions, see our year-end RRSP top-up calculator.
CPP and EI: The Retiring Allowance Exemption
This is one of the clearest benefits of the retiring allowance classification. Regular employment income is subject to:
CPP employee contribution (2025): 5.95% on earnings $3,500–$71,300 + CPP2 on $71,300–$81,200
Maximum employee CPP/CPP2 contribution: approximately $4,400
EI employee premium (2025): 1.64% on earnings up to $65,700
Maximum employee EI premium: approximately $1,077
At $85,000 salary, you have likely already maxed out both CPP and EI for the year before the severance is paid. But if the severance were classified as regular employment income instead of a retiring allowance, the employer would need to recalculate pensionable and insurable earnings. The retiring allowance classification avoids this issue entirely — the $60,000 is simply excluded from both CPP and EI calculations.
Strategic Timing: When You Lose Your Job Matters
The tax impact of your severance depends heavily on when in the calendar year you are terminated:
- Early in the year (January–March): Your salary income for the year will be low. The severance may be taxed at a lower marginal rate because there is less stacking. This is the best scenario for taking the full lump sum in one year.
- Late in the year (October–December): You have already earned most of your salary. The severance stacks on top at the highest marginal rate. This is when splitting across two years provides the most benefit.
- Mid-year: The math is somewhere in between. Consider whether contributing to your RRSP is enough to bring your income back to a manageable bracket, or whether the split is also needed.
Important Disclaimer
This article provides general information about the tax treatment of severance packages in Ontario based on 2025 federal and Ontario tax rates and legislation. The retiring allowance classification, RRSP transfer eligibility, withholding rates, and tax calculations presented here are based on the Income Tax Act and CRA administrative guidelines as of 2025. Tax brackets, surtax thresholds, CPP/EI maximums, and RRSP limits are based on 2025 announced rates. Every individual's tax situation is unique — your actual tax owing will depend on your complete income, deductions, credits, and personal circumstances. The severance classification (retiring allowance vs. regular income) depends on the specific terms of your employment and termination. This is not tax, legal, or financial advice. Consult a qualified tax professional or employment lawyer before making decisions about your severance package.