Your Money Matters May 2012 Issue

Federal Government Employees: Changes to your Severance packages

Well, although some government unions saw this a year ago, many are just seeing the changes since the April federal budget. There are several departments within in the government that have been told that the discontinuance of their severance was effective March 31^st.  I know some have to decide what to do by June, September and some even next February. Although the “rates of pay and percentage increases vary from department to department” most people have the same basic options:

1. Cash out your Severance based on today’s salary

2. Roll some or all of the severance to an RRSP (if you have the RRSP contribution room)

3. Leave it where it is until retirement – at your exit rate of salary.

Q. What are the tax implications of the cash out?
A. Income tax is deducted from the cash payout. These payouts are not pensionable. They do not contribute to the calculation of your pension. However, if you have not hit the maximum for your Employment Insurance (EI) and Canada Pension Plan (CPP) these may be deducted from the severance payout.

For the immediate cash pay-out, the only option for reducing tax at source is for individual employees to use personal unused RRSP room. For example, if an individual has $20,000 of unused RRSP room, and they receive a cash payment of $20,000, then the employer will not withhold income tax on the $20,000. However, you must purchase an RRSP for the entire amount. You can always consult the latest Canada Revenue Agency Income Tax Interpretation Bulletin on severance pay (Retiring Allowances) for complete details:

www.cra-arc.gc.ca/E/pub/tp/it337r4-consolid/it337r4-consolid-e.html

Q. What are the advantages of waiting to cash-out until I resign or retire?
A. If you take the voluntary severance cash-out in 2012, each week of severance pay will be calculated on the rate of pay in effect of your contract,  it may or may not include any increases. If you cash it out when you resign or retire, it will be paid at your exit rate of pay. For employees who expect to be promoted throughout their career, their exit rate of pay could be considerably higher than their current rate of pay. In addition, you may be able to benefit from a special RRSP contribution on retiring allowances of $2000 for each year of service up to and including the year 1995. For example, if someone started work in 1981, and had a total of 15 years of service between 1981 and 1995, then they have an additional $30,000 of RRSP contributions that can be made. This can only be used upon termination and cannot be used for the immediate cash pay-out. Note that this additional RRSP room was ended beginning with the1996 tax year.

The third way of reducing the tax payable on the deferred option is to retire/resign early in a taxation year when you expect the rest of your income to go down.

As with most financial decisions, everyone’s situation is different. I do encourage you to give us a call if you will be affected by this situation. We would be happy to go through your options with you individually to see which would best suit your situation. If you know of anyone who is going through this situation and would like us to help them, we would be honored if you gave them our name.

Thank you again for your continued trust.

Theresa Wever and the Money Concepts Team

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