A bit of planning can go a long way when it comes to severing a relationship with your employer. We recently helped a client save close to $20,000 in tax after severing a relationship with an employer.
The client was offered a severance payment of $120,000 plus pension that, upon being released, generated an unsheltered tax amount of just under $71,000. The taxable amount was going to be released as a lump sum.
Immediately the mandated 30 percent withholding tax, totalling $57,300, was sent to the Canada Revenue Agency. A year from now, they would maximize their RRSP room and get a tax refund of about $11,000. Total taxes paid this calendar year would have been $46,369.
Tax planning was a game changer.
1. We recommended our client go back to the employer to request that they remit the maximum amount to the employee’s RRSP, causing less holding tax to be withheld immediately. This is something employers can and should do, but you may need to ask.
2. We recommended our client ask the employer to spread the cash allotment over two years instead of one. This allowed for less immediate withholding taxes and a total tax liability of $26,954 over the two years.
The employer agreed to both requests, which resulted in a total savings of $19,415 for our client!
The moral of this story is, when severing ties with an employer, it pays to plan and ask the employer to help structure your severance pay in a tax-efficient way.