Personal Finance

Severance alternatives - please help choose

  • Last Updated:
  • Jan 11th, 2019 2:21 pm
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Feb 19, 2010
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sqara82 wrote:
Jan 8th, 2019 8:34 pm
Paying into the RRSP directly isn't an option they offer unfortunately.
Why?

You should re-visit this with your employer as this is doing you a disservice. There's no good reason why they can't make a cheque payable to your RSP institution instead of you.

This would preclude the tax at source rather than taxing you, giving you a much smaller payout, and then you having to wait until you file your 2019 tax return to get your money back (assuming that you're going to contribute a considerable amount to RSPs).
Sr. Member
Jan 1, 2017
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Take the lump sum and run. As others have said if you have continuous pay this will be stopped when you start your new job. Once you have the money you can contribute the money to the RRSP yourself and you will get the withheld tax back from Revenue Canada the following year when you file your tax return for 2019 or even this year if you file this as 2018 RRSP contribution in the first 60 days. So you won’t be losing any of the money you paid in taxes.
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Dec 31, 2007
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hamandcheese wrote:
Jan 8th, 2019 11:41 am
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.

this is true. check the documentation before you select. with salary continuance, once you find a new job, the remaining payout maybe forfeited or clawed back. since you are starting in february, best to take the lump sum and see if you can put some in a rrsp, eitherwise just take the tax hit and move on.
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ProductGuy wrote:
Jan 9th, 2019 10:03 am
Take the lump sum and run. As others have said if you have continuous pay this will be stopped when you start your new job. Once you have the money you can contribute the money to the RRSP yourself and you will get the withheld tax back from Revenue Canada the following year when you file your tax return for 2019 or even this year if you file this as 2018 RRSP contribution in the first 60 days. So you won’t be losing any of the money you paid in taxes.
As to the bolded part, probably not the best plan to claim the RSP deduction for 2018 given that OP's income is going to be around $100K higher in 2019 than 2018 ($80K severance + $20K raise). Depends on what his total income looks like of course.

Still would be better to have the employer cut a cheque to his RSP plan and preclude the tax at source. OP, if you have a lawyer involved in this separation from employment, this should be an easy term to incorporate if the RSP contribution is part of your plan.
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Aug 20, 2015
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Toronto
To me the only benefit of option 2 over 1 (assuming they do not clawback once you start your new job) is the RRSP matching. How much is the RRSP match, if it's say 5% that's an extra 4000 in pay. Also $8000 would be put into RRSP and the other $76,000 would be paid as regular income.

If this doesn't seem beneficial to you I'd go with option 1 because the tax hit next year would be the same as option 2 in any case. Just wipe your hands and move on.

Edit: Also how does the vacation credit work? Do they just pay you out those extra days based on what your income was? So if you got an extra 12 days credit would you get another roughly $4k from it?
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Nov 10, 2003
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Concord
sqara82 wrote:
Jan 8th, 2019 8:34 pm
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. :-)
Just take the lumpsum and you can put it into RRSP in any way you want. The thing to watch out for is how to maximize your tax return. In 2019, you will have dual income. Therefore you want to maximize your benefit first then sharing the remaining.
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Aug 30, 2011
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xg3 wrote:
Jan 10th, 2019 2:57 pm
Just take the lumpsum and you can put it into RRSP in any way you want. The thing to watch out for is how to maximize your tax return. In 2019, you will have dual income. Therefore you want to maximize your benefit first then sharing the remaining.
Curious what you mean by this (bolded text)
Sr. Member
Aug 5, 2008
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Wow. So many assumptions so little time. People assuming the salary would stop when new job starts, and assuming there is RRSP space.

Clearly lots of facts missing.

OP needs to share the wording of both agreements (options) and the information about RRSP space and other tax relevant details.

OP mentions "partner" but fails to mention the status (common law?).

Gift does not remove OPs tax obligations. Gift is post-tax.

Without relevant details, discussion is pointless
There are 10 kinds of people in the world... Those who understand binary and those who don't 💡
Sr. Member
Jan 8, 2009
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Salary continuance, provided there is no language in the severance agreement restricting you from being employed while collecting the salary continuance.

This post proves the point that everyone on RFD makes over $100K.....
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Jan 14, 2010
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Central Ontario
I would take the lump sum. Why trust that the company will be fiscally sound over the time period of the extended payout?
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Dec 27, 2009
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junkmail2002 wrote:
Jan 10th, 2019 8:35 pm
Wow. So many assumptions so little time. People assuming the salary would stop when new job starts, and assuming there is RRSP space.
OP did say something about $100K RRSP space (but it was between him and his partner - not sure how much is OP's). It is probably a reasonable assumption that the payments would stop on OP finding another job since that is often how these things are set up. Since OP has not bothered to clarify, then people can't be blamed for making a few assumptions. There is always value in the discussion (not pointless as you said), since even if it doesn't apply to OP it will apply to someone who might also look up this thread.
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Nov 10, 2003
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The OP total income of 2019 will be in a higher bracket than the spouse. Therefore, OP RRSP contribution should be higher than the spouse before contributing towards the spouse.
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xg3 wrote:
Jan 11th, 2019 1:52 pm
The OP total income of 2019 will be in a higher bracket than the spouse. Therefore, OP RRSP contribution should be higher than the spouse before contributing towards the spouse.
If they put into a spousal RRSP, it is the OP that gets the deduction anyways (plus it uses up OP's contribution room).

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