LIFE LETTER MATURE
Tax planning for severance packages
It is becoming more common for employees to receive a severance package and be advised that their services are no longer required. The longer you’ve been employed with an organization, the larger your severance package may be. Today's job market makes it more important than ever to ensure you hang on to as much of your settlement as possible.
If you don’t plan ahead, the tax authorities have no problem relieving you of a large portion of your package. A professional tax and investment advisor can help you choose a strategy that best fits your circumstances. Your options include:
Registered Retirement Savings Plans - Most of us are aware of the tax advantages of RRSPs. Assuming you have room to invest, placing your severance pay into an RRSP is an ideal investment option. If you find yourself needing funds before retirement, it is best to contact a tax professional.
Retiring Allowance - This investment option allows you to shelter severance pay based on the duration of service with the company and the particular years employed prior to 1995. The amounts that can be transferred vary depending on which years you were employed. Due to the complexity of the calculation, a tax and investment planner will be able to advise you on its merits. The retiring allowance can be used over and above the limits imposed on RRSPs.
Tax Sheltered Insurance Accounts - A tax sheltered insurance account allows you to acquire tax-postponed or tax-free earnings within the policy. It can provide for future retirement income at a reduced tax rate and offers tax-free proceeds to your beneficiaries. This may not be the best option for investing your severance package. However, if other options have been maximized, you may want to discuss this with your financial advisor.
Invest In Your Own Business - You likely don’t want to invest your severance directly into a business opportunity as Canada Revenue Agency will be looking for their chunk right off the top. You can, however, shelter the money and then withdraw funds if needed. Your tax burden may be reduced due to the fact that your income might be lower during the start-up period.
Starting a new business may be a viable option for those who have been downsized. Before starting any new enterprise, consult with a tax professional.
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