Severance packages or termination packages are generally reported as income in the year you receive the money. There is an option available to have the income taxed in the years for which the money applies. CRA will make the calculations for you to determine which method is more beneficial. If the payments include damages for mental anguish, humiliation or loss of self respect, this portion of the payment is not taxable. You may also be able to transfer all or a portion of your severance to an RRSP over and above your normal limits. You are allowed to transfer $2,000 for each year before 1996 plus an additional $1,500 before 1989 for which your employer’s contributions to a pension plan were not vested to you. Legal fees to obtain a severance are also deductible, but only to the extent of the severance received and not transferred to an RRSP.
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