Why is so much tax withheld from my severance package?

Arsen Accounting Services · Question 121 · Sources checked October 29, 2026

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A severance package can contain several different payments. Salary continuation, vacation pay, wages in lieu of notice, and a retiring allowance do not necessarily have identical payroll treatment. Start by obtaining a written breakdown of the package.

Withholding is not the final tax calculation

CRA distinguishes a retiring allowance for loss of employment or long service from ordinary employment payments. The classification affects withholding and reporting. The final personal return then takes account of your total income, deductions, credits, and tax already withheld.

Do not assume the percentage withheld is your final tax rate. A package received in a year with substantial employment income can produce a different result from one received in a low-income year. Any RRSP transfer or deduction must meet its own requirements.

Official guidance: [1].

Plan using the actual components

For example, an employee may describe the entire payment as severance even though part is unpaid vacation and part is a retiring allowance. A tax estimate based only on the deposit can miss both the gross income and the different reporting categories.

Request a complete package file

• The termination agreement and payment schedule.
• A breakdown of each payment category and deduction.
• Current-year income earned before and after termination.
• RRSP records and any proposed direct-transfer documentation.

Ask for a tax estimate before committing the net payment to debt repayment or a major purchase. If payments span more than one calendar year, provide the actual dates and agreement terms. Keep legal-fee invoices separately, because their deductibility follows additional rules. Review the tax slips against the agreement when they arrive.