Tax planning for severance packages is an important issue because the amount of money is usually significant. The first thing to consider is the special rules that relate to retiring allowances. Retiring allowances can include severance payments or termination payments, settlements for wrongful dismissal and payments for long service on retirement. The amount that can be transferred tax-free to an RRSP rather than being taxed as income when received is $2,000 per year for years of employment prior to 1996. You can also transfer an additional $1,500 a year for years of employment prior to 1989 for which pension plan contributions have not vested. The legal fees you pay to review or obtain the severance will usually be deductible against the retiring allowance, so keep your legal invoices. If you transfer the entire retiring allowance to an RRSP, the legal fees will not be deductible. Once the money is removed from the RRSP it is no longer considered a retiring allowance and the legal fees will not b deductible. So, you may not want to transfer the total amount of the retiring allowance to an RRSP if you want to deduct the legal fees.
Another issue to consider is where you will invest the money. You may want to consider capital class mutual funds that are tax efficient.
A spousal contribution should also be explored if you are married / common law. This will be an excellent income splitting opportunity if your spouse is in a lower tax bracket. You, the recipient of the severance payment, will have to have RSP contribution room, however. Check your latest notice of assessment to determine what your contribution limit is.
Retirement compensation arrangements are useful in some situations. If applicable, we can refer you to our parent company, GTA Wealth Management Inc. for complete wealth management services for your personal financial portfolio. You have come the the right place with the Tax Doctors.
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