Job Restructured - What to do with Severance?

freakoutguy wrote: ↑ A friend of mine's role was recently restructured. As part of his severance, he is getting one year salary (200K) and bonus (50K) as a lump sum in January 2021.

The severance will be taxed at 30% and the bonus will be taxed at 50% (approximately)

Would it make sense for him to deposit the entire 50K bonus into his RRSP and get a tax rebate of approximately 24-25K or just pay taxes on the bonus outright?

If your friend have RRSP contribution room then why not? But if he/she need $ down the line, withdrawing from RRSP will have a 25% withholding tax.

cgtlky wrote: ↑ If your friend have RRSP contribution room then why not? But if he/she need $ down the line, withdrawing from RRSP will have a 25% withholding tax.

Makes sense - Logically, if he were to take the full 50K he would only get 25K as the payout after taxes. If he contributes the full 50K to the RRSP, he still gets the same payout in the form of a tax rebate and is also able to grow the 50K within the RRSP?

I will let others confirm this to still be effective but when I retired ('97) I was given a bonus severance due to the restructuring of the RCMP in the mid-90s. I had the option to have it directly deposited into an RRSP and avoid paying any tax on that amount. The only thing is that I could not use any of that money for an RRSP contribution deduction. Again, maybe someone with more knowledge can comment if this option is still available.

The purpose of RRSP is tax deferral, preferably at a time when your income is lower and tax is lower as a result. There is nothing wrong with withdrawing from it at a later date even when not retired, heck it is beneficial to do so.

The only time where this can be a problem is if you already have RRSP contributions maxed out.

freakoutguy wrote: ↑ A friend of mine's role was recently restructured. As part of his severance, he is getting one year salary (200K) and bonus (50K) as a lump sum in January 2021.

The severance will be taxed at 30% and the bonus will be taxed at 50% (approximately)

Would it make sense for him to deposit the entire 50K bonus into his RRSP and get a tax rebate of approximately 24-25K or just pay taxes on the bonus outright?

If all 200K + 50K are paid out in 2021, then the total tax will be higher than 30%.
https://www.taxtips.ca/taxrates/on.htm

ml88888888 wrote: ↑ If all 200K + 50K are paid out in 2021, then the total tax will be higher than 30%.
https://www.taxtips.ca/taxrates/on.htm

The 50k is the annual bonus which is taxed separately at 50%. The 200k is the severance bonus which is taxed at 30% , as it is paid out as a lump sum and

freakoutguy wrote: ↑ The 50k is the annual bonus which is taxed separately at 50%. The 200k is the severance bonus which is taxed at 30% , as it is paid out as a lump sum and

There's no such thing. The withholding tax percentage might be different but at year end, when you do your taxes, income is income is income.

Jon Lai wrote: ↑ There's no such thing. The withholding tax percentage might be different but at year end, when you do your taxes, income is income is income.

https://www.canada.ca/en/revenue-agency ... ments.html

This is from the CRA website which says that withholding taxes in lump sum severances are subject to 30% taxes

freakoutguy wrote: ↑ https://www.canada.ca/en/revenue-agency ... ments.html

This is from the CRA website which says that withholding taxes in lump sum severances are subject to 30% taxes

Yes the withholding taxes are 30% but that is just a downpayment until you do the tax return. Your friend's marginal tax rate will be much higher based on his other income when his tax return is prepared.

DaveTheDude wrote: ↑ Yes the withholding taxes are 30% but that is just a downpayment until you do the tax return. Your friend's marginal tax rate will be much higher based on his other income when his tax return is prepared.

Yes. Above 50% even and anything else he makes in 2021 will be the same.

Actually RRSP is the same in that it is taxed at marginal rate.

freakoutguy wrote: ↑ A friend of mine's role was recently restructured. As part of his severance, he is getting one year salary (200K) and bonus (50K) as a lump sum in January 2021.

The severance will be taxed at 30% and the bonus will be taxed at 50% (approximately)

Would it make sense for him to deposit the entire 50K bonus into his RRSP and get a tax rebate of approximately 24-25K or just pay taxes on the bonus outright?

I presume you mean apply the contribution to 2020 and receive a refund before April 2021.

If his wife does not work or has a low income, maybe put it into a spousal RRSP and she can start to draw it out in 2023.

taxrage wrote: ↑ I presume you mean apply the contribution to 2020 and receive a refund before April 2021.

If his wife does not work or has a low income, maybe put it into a spousal RRSP and she can start to draw it out in 2023.

So essentially, he contributes the full 50,000 to Spousal RRSP in 2021 March and gets the benefit of tax rebate on his 2021 income. Then the spouse (who presumable has no income), starts withdrawing less than 11,000 (federal amount) in each year from 2023 and pays no taxes?

Someone earning $200K/yr salary should be able to afford to consult a financial planner.

Scote64 wrote: ↑ Someone earning $200K/yr salary should be able to afford to consult a financial planner.

I will pass on your advise to him

freakoutguy wrote: ↑ So essentially, he contributes the full 50,000 to Spousal RRSP in 2021 March and gets the benefit of tax rebate on his 2021 income. Then the spouse (who presumable has no income), starts withdrawing less than 11,000 (federal amount) in each year from 2023 and pays no taxes?

It would also mean the high earning spouse would lose the spousal tax credit. There is still a benefit though for the difference in his tax rate when the RRSP was deducted and his lost spousal tax credit.

Scote64 wrote: ↑ Someone earning $200K/yr salary should be able to afford to consult a financial planner.

Honestly, given the generally sales oriented nature of financial planning industry, this is the one instance where internet advice is valuable. Just way too many sharks in the water. Obviously, if the OP doesn't want the friend to blame him when something goes wrong, a financial planner from a big bank might be the only option.

Regarding spousal RRSP, paying for the advice of an account might be worthwhile, assuming the accountant doesn't push the service of an investment advisor.

freakoutguy wrote: ↑ So essentially, he contributes the full 50,000 to Spousal RRSP in 2021 March and gets the benefit of tax rebate on his 2021 income. Then the spouse (who presumable has no income), starts withdrawing less than 11,000 (federal amount) in each year from 2023 and pays no taxes?

Spousal RRSP can only access after 3 years else it will be tax at your friend hand. if the spouse have no job, then no RRSP contribution room either.

cgtlky wrote: ↑ Spousal RRSP can only access after 3 years else it will be tax at your friend hand. if the spouse have no job, then no RRSP contribution room either.

A spousal RRSP uses the high earning spouse's contribution room. Not the non working spouse's room.

cgtlky wrote: ↑ Spousal RRSP can only access after 3 years else it will be tax at your friend hand. if the spouse have no job, then no RRSP contribution room either.

1. The contributor needs the contribution room, not the beneficiary (spouse)
2. The rule is actually that the contributor cannot have contributed in the current and previous 2 calendar years, so if the first contribution is Dec 31/2020, the money can start to come out in Jan 2023 (in this case, no additional contributions in 2023, no contributions in 2021/2022).