Personal Finance

Severance alternatives - please help choose

  • Last Updated:
  • Jan 11th, 2019 2:21 pm
[OP]
Member
Aug 20, 2014
217 posts
73 upvotes
Toronto, ON

Severance alternatives - please help choose

Hi folks, I'm negotiating a severance package from my company and they are offering two options. Looking for some help in deciding which one works better.

First, about me: Mid 30's. Worked in this company for 10 years. I make approx $100,000 in the current job which is ending. Already found a new job starting in February, making $120,000 in the new one. No debts except a $350,000 mortgage. About $100,000 room in RRSP and TFSA for me + partner.

Severance: I'd be eligible to get approx $80,000 (nearly 10 months of salary) which I can draw in two ways.

Option 1: Lumpsum.
I suppose the employer will withhold taxes.

Option 2: Salary continuance.
I'll get paid for approx 10 months and I suppose the employer with withhold taxes, pay CPP, EI. During this time, I continue to get benefits, RRSP matching, vacation credits. I don't know if I should care for this perks; the new employer has very similar benefits.

If you were me, which option would you pick? In either case the 2019 income is going to show a huge spike.

Thanks in advance!
-R
27 replies
Deal Fanatic
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Mar 23, 2008
9749 posts
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Edmonton
I would talk to the old employer and see if it can all be put into an RRSP as a lump sum. Then there would be no tax hit at year end (or withholding now), hopefully. Doesn't seem to be any benefit to taking it over 10 months, as you'll be double covered for benefits, CPP, EI, etc.

C
Sr. Member
Sep 12, 2012
660 posts
437 upvotes
Toronto
Usually with most companies, when you take the Lumpsum option the employer gives you a certain percentage of the severance amount as opposed to the whole amount. And with the Salary Continuance option, it is usually paid out to you as a regular paycheck until you find yourself a new job which thereafter the remaining amount would be forfeited. But each companies severance offer is different. My point is, make sure you know ALL of the facts before you make any decisions.
Last edited by hamandcheese on Jan 8th, 2019 11:55 am, edited 1 time in total.
Deal Addict
Jan 28, 2009
1889 posts
386 upvotes
Calgary
This is a good chunk of money.

Talk to a lawyer.
Deal Fanatic
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Dec 27, 2009
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Ottawa, ON
Take the lump sum, and talk to your employer about putting it into RRSP (so they don't withhold tax).
Deal Fanatic
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Feb 19, 2010
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OP mentioned $100K in combined room between RSP and TFSA for both he and his partner. To that end, one can only transfer the amount of his own contribution room to an RSP, either his or spousal, on a tax-deferred basis.
Deal Addict
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May 11, 2014
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Iqaluit, NU
Option 2 seems like it would come out higher based on the given info alone. Although your CPP and EI is double coverage, but your portion will come back. RRSP match alone doubles your money, and vacation credits to boot.

There must be details missing
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Sr. Member
Nov 10, 2003
727 posts
118 upvotes
Concord
I have been in this situation and what it came down to is whether or not you are pushing some of the income to the following year.

Based on your initial posts, it would appear that option 1 or 2 fall into the same calendar year which shouldn't make any difference.
Deal Addict
Aug 30, 2011
3301 posts
1029 upvotes
Ottawa
You must have the RRSP room though, even for a direct transfer of severance (unless it applies to years worked before 1996)
Lump-sum severance payments transferred directly into a Registered Retirement Savings Plan
If you get your severance pay as a lump-sum payment, you may ask your employer to transfer it directly to your Registered Retirement Savings Plan (RRSP) or a Registered Pension Plan (RPP).

This means your employer won’t deduct income tax from the lump-sum payment. Instead, you’ll pay tax on the money when you take it out of your RRSP or RPP.

You must have enough RRSP contribution room available to transfer your severance pay directly into your RRSP. The exception is for severance pay that applies to years worked before 1996. That money doesn’t affect your yearly RRSP contribution room when you transfer it directly into an RRSP.
https://www.canada.ca/en/financial-cons ... e-pay.html

EDIT: didn't notice that Conquistador already mentioned this.
Deal Addict
Dec 12, 2009
3473 posts
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Toronto
A question to throw into the mix. Given the potential timing of the lump sum payment - can the registered plan contributions be split over taxation years? i.e. some to 2018 and some to 2019?
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Deal Addict
Apr 21, 2014
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Alberta
CNeufeld wrote:
Jan 8th, 2019 11:29 am
I would talk to the old employer and see if it can all be put into an RRSP as a lump sum. Then there would be no tax hit at year end (or withholding now), hopefully. Doesn't seem to be any benefit to taking it over 10 months, as you'll be double covered for benefits, CPP, EI, etc.

C
This!! If you don’t need the money and already got a higher paying job, and you have the contribution room. Drop it all in the RRSP. Then you can choose how much to deduct each year (tax planning).
Sr. Member
Mar 6, 2010
726 posts
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Check the contract to see any impact if u get a new job during the option2 payout. Then aswer is obvious to be number 1if that is the case
Deal Fanatic
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Dec 27, 2009
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OttawaGardener wrote:
Jan 8th, 2019 4:43 pm
You must have the RRSP room though, even for a direct transfer of severance (unless it applies to years worked before 1996)



https://www.canada.ca/en/financial-cons ... e-pay.html

EDIT: didn't notice that Conquistador already mentioned this.
OP mentioned $100k in room between his wife and himself. I have no idea how much of that $100k is his contribution room, but if a lot of it is his then he should take it in his RRSP.
Deal Fanatic
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Dec 27, 2009
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abc123yyz wrote:
Jan 8th, 2019 6:28 pm
This!! If you don’t need the money and already got a higher paying job, and you have the contribution room. Drop it all in the RRSP. Then you can choose how much to deduct each year (tax planning).
I would imagine it would make sense to claim the full deduction in 2019 since OP will be making $120k on top of this payout. If he doesn't claim it this year the tax bill would be tremendous.
[OP]
Member
Aug 20, 2014
217 posts
73 upvotes
Toronto, ON
Thank you all for the comments. :-)

Paying into the RRSP directly isn't an option they offer unfortunately.

As for the RSP contribution, I was hoping to gift some of the money to my partner, and he can claim it in his RRSP room, right? While it doesn't reduce my tax, it does increase our family savings. Anyways, this point wasn't really relevant to my question, I don't know why I mentioned it. :-)

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