What the payroll deduction means
Up to CA$5,000
10%
Rest of Canada withholding
CA$5,001 to 15,000
20%
Rest of Canada withholding
Over CA$15,000
30%
Rest of Canada withholding
A large deduction from a severance cheque is not proof that you have been overtaxed. In Canada, a qualifying severance payment is usually treated as a retiring allowance. The employer withholds tax using CRA lump-sum rates, then the payment is included in your income when you file your return. Your total income, province, credits, deductions and tax already paid decide the final result.
For residents outside Quebec, the published withholding rates are 10% on CA$5,000 or less, 20% on CA$5,001 to CA$15,000, and 30% above CA$15,000. The rate is based on the total retiring allowances paid or expected in the calendar year, not on each instalment viewed alone. CRA's retiring-allowance guidance also confirms that CPP and EI are not withheld from a retiring allowance.
Check your ordinary salary take-home and provincial tax before you sign a settlement.
Open the Canada Salary CalculatorA CA$30,000 severance example: cash now versus tax later
Assume a Canadian resident outside Quebec receives a single CA$30,000 retiring allowance paid directly to them. The employer uses the 30% withholding rate, so CA$9,000 is withheld and CA$21,000 is paid initially. That does not calculate the employee's final tax. The full CA$30,000 is still part of taxable income for the year.
| Gross retiring allowance | CA$30,000 |
| Payroll withholding at 30% | CA$9,000 |
| Cash paid initially | CA$21,000 |
| Final tax position | Recalculated when the tax return includes all income |
This is a withholding illustration, not a tax estimate. The amount refundable or still payable depends on the individual's complete return.
Quebec is not simply “30% plus a little more”
For Quebec residents, the 5%, 10% and 15% CRA rates are federal withholding rates. Quebec tax withholding is separately administered. This matters because a payslip can show a federal amount and provincial deduction that do not resemble the rest-of-Canada 10/20/30 table. Use Revenu Québec's retiring-allowance guidance and the employer's payroll breakdown to identify what was withheld and why.
Two planning conversations to have before payment
Ask for the payment breakdown
Not every termination-related amount has the same treatment. Ask which sum is retiring allowance, notice pay, vacation pay, bonus or benefit continuation, and get the T4 reporting codes in writing.
Check RRSP transfer eligibility early
An eligible direct transfer to an RRSP or registered pension plan may avoid withholding on that transferred portion. It is not the same thing as deciding to contribute cash after payment.
Do not optimise the tax before checking the legal entitlement
The tax treatment does not tell you whether the amount offered is the amount owed. Statutory termination rights, employment contract terms, collective agreements and common-law notice can be separate questions. For Ontario ESA minimums, start with our Ontario Severance & Notice Calculator. Obtain employment-law and tax advice before signing a release or directing a transfer.
Monthly briefing
Get our monthly salary and market update
Salary movements, contractor rate changes, tax updates, and new tools. Sent once a month, no noise.
No spam. Unsubscribe any time. GDPR-compliant.
Frequently asked questions
Is severance pay taxable in Canada?
Yes. A qualifying severance payment is generally a retiring allowance, taxable as income in the year you receive it. The withholding on the cheque is an amount collected upfront, not a separate final severance-tax rate.
Why did 30% come off my Canadian severance cheque?
For a Canadian resident outside Quebec, CRA's lump-sum withholding rate is 30% when the total retiring allowances paid or expected in the calendar year are over $15,000. This is usually income-tax withholding only. CRA says CPP contributions and EI premiums are not withheld from a retiring allowance.
Is the 30% rate the tax I will finally pay?
No. Your final tax is calculated from all taxable income for the calendar year when you file. The 30% may be too high, too low or close to your final result depending on salary earned, deductions, province and other income.
How does Quebec severance withholding differ?
CRA's 5%, 10% and 15% Quebec rates are federal withholding rates. Quebec provincial withholding is a separate obligation. Confirm the payroll treatment with Revenu Québec or your employer rather than treating a 15% federal deduction as the whole result.
Can a retiring allowance go directly into an RRSP?
Some eligible portions can be directly transferred to an RRSP or registered pension plan without income tax being withheld. Eligibility is limited by historic service before 1996 and the transfer rules. Ordinary RRSP room and direct-transfer eligibility are different questions, so obtain the employer's breakdown before choosing a payment route.
Can I split a severance payment over December and January to reduce tax?
A payment genuinely received in a later calendar year can change the year in which it is taxed, but payments or instalments within the same calendar year are aggregated when the payer determines the lump-sum withholding rate. Do not assume an instalment plan automatically reduces withholding or final tax. Take legal and tax advice before negotiating a release.
Sources: CRA, Payments of retiring allowances; Revenu Québec, Allocation de retraite. General information only, not employment-law or tax advice.