Severance pay is taxable in Ontario. But the tax withheld from your payment is not necessarily the final tax you owe.

Whether you receive a lump sum or salary continuance also affects when you get the money, how benefits are handled and what happens if you find another job.

Samfiru Tumarkin LLP helps non-unionized employees across Ontario review severance offers and negotiate payment terms. Before signing, compare the complete package—not just the amount deposited into your account.

⚠️ Offered a choice between a lump sum and salary continuance?
Check the total compensation, deductions, benefit coverage and conditions tied to finding new work. A payment schedule that looks convenient can still contain terms that reduce what you receive.

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Lump Sum vs. Salary Continuance: What’s the Difference?

A lump sum pays your settlement at once. Salary continuance provides regular payments over an agreed period. Neither option is automatically better.

What to compare Lump-sum severance Salary continuance
Payment timing One payment on the agreed date Regular payments over a set period
Tax deductions Depend on how each part of the payment is classified Payroll deductions apply to salary payments
Finding another job Check for repayment or other conditions in the settlement Payments may stop or decrease if the agreement contains a re-employment clause
Benefit coverage A lump sum doesn’t erase statutory benefit obligations. Additional coverage needs to be addressed Confirm which benefits continue and their exact end dates

A settlement can also combine an upfront payment with later instalments. Paying a settlement in instalments does not automatically make it salary continuance. The legal arrangement and the nature of the payments matter.

You should always get a severance package review to determine how your compensation may be structured.

Is Severance Pay Taxable in Ontario?

Yes. Severance is taxable, but the Canada Revenue Agency distinguishes between different types of termination payments.

  • Retiring allowance: Compensation for the loss of employment can fall into this category. You don’t have to retire to receive a retiring allowance
  • Employment income: Salary continuance, outstanding wages, bonuses, vacation pay and wages in lieu of termination notice are treated separately

One termination package can contain both categories. Receiving everything in one cheque doesn’t mean every component has the same deductions.

Ask for a written breakdown showing what each payment represents and how it will be reported.

How much tax is withheld from a retiring allowance?

For a retiring allowance paid directly to an Ontario resident, the standard income-tax withholding rates are:

Amount Standard withholding rate
$5,000 or less 10%
More than $5,000, up to $15,000 20%
More than $15,000 30%

The employer considers the total retiring allowances paid or expected to be paid that calendar year. The applicable rate applies to the payment—not progressively like income-tax brackets.

Example: A $20,000 retiring allowance paid entirely in cash would have $6,000 withheld at 30%, leaving a $14,000 payment before any other applicable adjustments.

💡 Withholding is not your final tax bill.
When you file your return, your total annual income, deductions and credits determine the actual tax. You could owe more or receive a refund.

Are CPP contributions and EI premiums deducted?

Not from a retiring allowance. Salary continuance and wages in lieu of termination notice are subject to income tax, Canada Pension Plan contributions and EI premiums, subject to applicable limits and exemptions.

CRA uses a different income-tax calculation for wages in lieu of notice. Don’t apply the 10%, 20% or 30% table to every component of your package.

Can an RRSP Transfer or Payment Timing Reduce Severance Tax?

Transferring a retiring allowance directly to an RRSP

A qualifying direct transfer can avoid income-tax withholding on the amount transferred. It defers tax rather than making the money permanently tax-free.

For the portion that requires RRSP room, the transfer must fit within your available RRSP deduction limit. Special rules can allow an eligible amount connected to service before 1996 to be transferred without using ordinary RRSP room.

Confirm your available room, the payment’s classification and the required paperwork before the employer pays you. Ask for any agreed direct transfer to be written into the settlement.

Receiving payments in different tax years

Spreading payments across tax years can reduce tax if your income is lower in one of those years. It isn’t an automatic saving.

The arrangement must be properly established. CRA specifically recognizes a retiring-allowance instalment option chosen on or before employment ends, with instalments taxed in the year received.

Simply dividing a payment into smaller cheques in the same year doesn’t reduce your final annual income tax.

Have a tax professional compare the after-tax outcomes before agreeing to a payment schedule. Your employment lawyer can address the settlement terms and whether the full package meets your legal entitlement.

What Happens If You Find a New Job?

Check the agreement before assuming you can keep every remaining payment.

A salary-continuance offer may require you to report new employment and allow the employer to stop payments, deduct new earnings or pay only part of the remaining balance.

A lump-sum settlement can provide a fixed payment that isn’t reduced when you find work, but that protection should be clear in the terms. The words “lump sum” alone don’t rule out repayment conditions.

⚠️ Ten months of salary continuance may not mean ten months of guaranteed payments.
Before accepting, find out what happens if you start another job, earn consulting income or become self-employed.

You can seek a guaranteed payout or negotiate a portion of the remaining balance if you find work. Neither arrangement is automatic, and payment terms must still respect statutory minimum entitlements.

For an unresolved wrongful dismissal claim, new earnings can also affect damages. Read our guide to the duty to mitigate after termination.

Do Benefits End If You Accept a Lump Sum?

Not automatically. For employees entitled to notice under Ontario’s Employment Standards Act, employers must maintain required benefit-plan contributions during the statutory notice period, including when paying termination pay instead of providing working notice.

Choosing a lump sum doesn’t erase that obligation.

Beyond the statutory period, benefit continuation or compensation for lost benefits can depend on your contract, common-law entitlement and settlement terms.

Confirm each benefit separately. Health, dental, life insurance and long-term disability coverage may have different end dates. Don’t assume every plan continues just because salary payments continue.

Does Your Severance Payment Structure Affect EI?

Yes, and salary continuance needs a separate assessment.

Under the current temporary federal measure, qualifying separation earnings are not deducted from EI when the claim or allocation starts between March 30, 2025 and October 9, 2027.

True salary continuance is different: Service Canada’s guidance says the interruption of earnings needed to establish a claim doesn’t occur until the salary-continuance period ends. The temporary separation-payment measure doesn’t automatically make salary continuance compatible with immediate EI payments.

💡 Don’t choose a payout based on an assumption about EI.
Report the arrangement to Service Canada. For application timing, separation payments and later settlements, read our guide to how severance affects EI.

What Should You Check Before Accepting a Severance Payout?

  • Total entitlement: Compare the offer with what you’re owed, not just employment standards minimums
  • Payment breakdown: Identify salary, termination pay, retiring allowances, vacation pay, bonuses and other compensation
  • Payment dates: Confirm when each amount is due and which tax year it falls into
  • New employment: Check reporting obligations, reductions, repayment terms and any guaranteed balance
  • Benefits: Confirm coverage and contribution end dates for each plan
  • Tax planning: Check RRSP options and your expected final tax bill with a tax professional
  • Release: Understand which claims you’re giving up before signing

Start with our guide to severance pay in Ontario to understand the difference between minimum entitlements and a full severance assessment.

You can also read about negotiating a severance package and what a full and final release means.

Review the Amount—and the Payment Terms—Before You Sign.

A severance offer needs to be assessed as a complete package. Taxes, benefits and conditions tied to new employment can change what you ultimately receive.

The Ontario employment lawyers at Samfiru Tumarkin LLP help non-unionized employees review termination packages and negotiate compensation and payout terms.

Before you sign, always check first.

➡️ Review Your Severance Package or call 1-855-821-5900.

Compare Your Severance Payout Options

Before choosing a lump sum or salary continuance, understand what you’re owed, which benefits continue and whether finding a new job could reduce your payments.

Review My Severance Package