Three ways to stretch severance pay
1. Retiring allowance:Revenue Canada allows you to shelter money into what’s called a retiring allowance as part of the Income Tax Act. So long as your company qualifies — it must have a payroll of more than $2.5 million and one or more employees severed within the past six months — you can shelter $2,000 per year, for each year of service up to and including 1995 (even if you started work in November or December, for example, part years count as full years; therefore you can shelter the full amount for that year). For example, if you were hired in 1985 and severed in 1997, you would qualify for 11 years of sheltering.
2. Transfer to RRSPSuppose you determine you’ll have $10,000 remaining after your retiring allowance options are used. And to keep the exercise simple, also suppose you have $10,000 of RRSP contribution room available for the year. You can ask your employer to take that $10,000 and put it into your RRSP (the employer must get Revenue Canada’s approval to do so through a letter). At year end, the company will send you a slip that says they paid you $10,000 with no taxes withheld. Normally you would claim this as incomfor the year and pay taxes on it. But try to arrange to have the employer pay out this money the following year. That way it becomes income for 1998. And if you arrange for the RRSP transfer described above, you will have all this money tax deferred in 1998, meaning you can claim this contribution on your 1997 tax return, lowering your taxable income. In other words, you’ve made a healthy RRSP contribution at a time when your income is high and you have money growing tax deferred, a big help as you search for a new job or make other plans. Should you have to draw on these funds, you may be taxed at a lower amount, and when funds are especially tight, it’s nice to know you’ll be giving less to the government.