🇨🇦 Canada · 5 min read · Published 2026-09-07 · Updated 2026-09-07

Written by Jordan Reeves · Editorial review: automated source and figure checks (how we check this)

Sources last verified: 2026-09-07

How Is Severance Taxed in Canada?

As employment income in the year received, which is the whole problem. A lump sum paid in the same calendar year as most of a normal salary can push a large part of it into the top bracket, and it also delays Employment Insurance benefits for the period it covers.

60-SECOND ANSWER

Severance is employment income in the year received, so the calendar year it lands in matters as much as the amount.

The answer:: The payment is taxed at your marginal rate in the year received, on top of whatever salary you already earned that year.
The trap:: Accepting a lump sum in December. The same amount paid in January is often taxed at a much lower rate.
The recommendation:: Ask whether payment can be split across two calendar years or made as salary continuance, because both spread the income.

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Where the AI summary above gets this wrong

"Severance pay is taxed at a lower rate because it is a lump sum."

That's surface-true. Here's what it misses:

It is ordinary employment income — There is no separate severance rate. It is added to the year's income and taxed at whatever marginal rate that reaches.
It delays Employment Insurance — Severance is allocated to a period of weeks following the end of employment, and benefits do not begin until that period ends.
Timing is the main lever — Splitting the payment across two calendar years spreads it across two sets of brackets, which can be worth more than negotiating a larger amount.

→ See what a lump sum costs at your rate

01 Why the year matters more than the amount

Severance is employment income, taxed at your marginal rate in the year received. Someone dismissed in October has already earned most of a year's salary, so a large payment lands almost entirely in the top brackets.

The same payment received in January is taxed against a year that may contain very little other income, which can be a difference of many thousands of dollars on an identical settlement.

Source: Canadian income tax rates for individuals

02 What it does to Employment Insurance

Severance and similar payments are allocated by Service Canada to a number of weeks following the end of employment, and Employment Insurance benefits do not start until that allocated period has run.

So severance does not stack with benefits; it postpones them. That does not reduce the total received, but it changes the cash flow, and it means claiming immediately is still worth doing so the claim is established.

WORKED EXAMPLE · Try the numbers

Shows: what a given amount of additional taxable income costs you in tax at your marginal rate, and what you keep. Ignores: provincial surtaxes, credits that phase out with income, and any effect on income-tested benefits.

Amount ($)

Your marginal rate (%)

What you keep after tax

$6,700

At a 33% marginal rate, $10,000 costs $3,300 in tax and leaves $6,700.

Source: Canadian income tax rates for individuals

03 The two levers that work

The first is timing. Asking for payment to be split across two calendar years, or delivered as salary continuance, spreads the income across two sets of brackets, and employers are frequently willing because it costs them nothing.

The second is RRSP room. A large deduction claimed against an unusually high income year is worth more than the same deduction in a normal year, and the transfer rules for pre-1996 service are in rolling a retiring allowance into an RRSP.

Legal fees paid to obtain or increase a severance settlement are deductible against the amount received, which is a third lever and the one most often missed. The deduction is claimed in the year the severance is included in income, so the invoice and the payment should be matched to the same year where possible. The record of employment issued by the employer states how the payment is allocated, and an error there shifts the start of benefits, so it is worth checking on the day it arrives.

Source: Contributing to an RRSP or PRPP

People negotiate hard on the number of months and never ask about the calendar. Moving a payment from late December to early January can be worth more than an extra month of severance, and it costs the employer nothing to agree to.