How do I Withhold Taxes for Severance in Canada?

by Rowena Odina

Severance pay is the amount paid to employees due to loss of employment or upon retirement to recognize their service to the company. In Canada, it is also called a retiring allowance. It covers payments of unused sick leave credits and other amounts received upon termination of employment. Severance pay is taxed based on lump-sum withholding rates set by the Canada Revenue Agency

Note whether the employee is a resident or non-resident of Canada, and in what province she is employed.

Calculate the tax as follows, if the employee is a Canadian resident not working in Quebec: For severance pay of not more than $5,000, tax is 10 percent of the amount. For severance pay over $5,000 but not more than $15,000, tax is 20 percent of the amount. For severance pay of more than $15,000, tax is 30 percent of the amount.

Calculate the tax as follows, if the employee is a Canadian resident working in Quebec: For severance pay of not more than $5,000, tax is 5 percent of the amount. For severance pay of over $5,000 but not more than $15,000, tax is 10 percent of the amount. For severance pay of not more than $15,000, tax is 15 percent of the amount.

Calculate tax at 25 percent of severance pay, if the employee is a non-resident of Canada. This is subject to Canada’s tax convention and agreement with the employee’s home country.

Do not deduct income tax on the eligible amount that is transferred directly to the recipient’s registered pension plan (RPP) or registered retirement savings plan (RRSP). An employee can transfer all or part of the severance pay to his RPP or RRSP based on conditions set by the Canada Revenue Agency.

Remit the tax deduction to a Canada Revenue Agency office.

Report the severance pay and tax on a T4A slip.

Items you will need

  • Calculator
  • T4A slip

About the Author

Rowena Odina has been writing handbooks, manuals and employee communication pieces since 2002 as part of her human resources management functions. She specializes in writing about human resources topics. She has a certificate in human resources management from Seneca College and a certificate in payroll management from the Canadian Payroll Association.

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