Is a Severance Package Taxable in Canada? What Employees Need to Know

Yes, severance is generally taxable in Canada.

But the real question is how it is taxed, what can be structured differently, and what surprises to avoid.

Severance can feel like it’s taxed “more” because a lump sum may be subject to higher withholding at the time of payment. Withholding rates in Ontario for lump sum severance packages at the time of writing are as follows:
• Up to $5,000.00: 10%
• Over $5,000.00 to $15,000.00: 20%
• Over $15,000.00: 30%

Withholding is not the same as your final tax result. Your ultimate tax depends on your annual income, deductions, and the specifics of the payment.

Often taxable:
• pay in lieu of notice
• lump sum severance payments
• certain bonus/commission payments

Sometimes different treatment can apply depending on how amounts are characterized and paid (this is where proper structuring matters).

Sometimes. Depending on your situation, options may include:
• allocating amounts properly (not everything should be described the same way) as some types of damages are tax-free
• considering eligible transfers where permitted (e.g., certain retirement-related rollovers in appropriate cases)

This is not “tax avoidance.” It’s proper structuring and documentation.

A good severance review considers taxes from the initial demand letter because those terms can limit your options later.