Statistics Canada reported Friday that the Canadian unemployment rate increased 8.4%. The highest level in 11 years. Clearly, the current economic recession seems to be taking its toll on Canadians. Today’s post is part of a short series on the options and strategies available should you lose your job.
When your employment is terminated, you may receive either a severance payment or, alternatively, a continuation of your salary for a period of time. You should be aware there is a difference in the tax treatment of each form of payment.
If you are offered a continuation of salary which includes any vacation pay, these payment will be treated just like your regular employment income. Income tax, EI and CPP will be deducted from the payment just link normal. Note that you may also receive a continuation of other benefits such as medical dental coverage, group life insurance, and pension benefits through the continuance period.
Severance is different than a continuation of your salary. Typically severance is a one-time, lump-sum payment (or made over a short period) that is paid in recognition of long service to the company.
A severance payment is fully taxable when you receive them. You may be able to transfer a all or portion to your RRSP and avoid the immediate taxation. Depending on when you began working with your employer, you may be able to directly transfer a portion of your severance to your RRSP without affecting your RRSP contribution room.
The amount you can directly transfer to an RRSP without affecting your contribution room is as follows:
- $2,000 per year of service for each year of employment before 1996, plus
- $1,500 per year of service for each year before 1989 if your employer made contributions to a pension or DPSP that had not vested.
Any amount that could not be directly transferred above can be contributed to your RRSP subject to your RRSP contribution room.
You can request a direct transfer of this amount to your RRSP to avoid paying tax now and getting a refund of it later.
Tomorrow’s article will deal with fringe benefits lost when you lose your job.