# Losing your job: severance, retiring allowances and EI

> Severance and EI benefits are both taxable. How tax is withheld from a lump sum, who can move severance into an RRSP, and paying back EI at tax time.

- Web page: https://taxnotes.ca/guides/losing-your-job/
- For: Individuals & families · Topic: Work and pay
- Last reviewed: 2026-10-10

Severance pay and Employment Insurance (EI) benefits are both taxable income. The tax taken off when they're paid may not cover what you owe, so plan for it, and check whether you can move some of your severance into an RRSP.

## Severance is a "retiring allowance"

For tax purposes, severance pay is a retiring allowance: an amount you receive when or after you leave a job, in recognition of long service or for the loss of your job. It includes payment for unused sick leave credits, and amounts paid when your employment ends even if they're damages for wrongful dismissal (when you don't go back).

Salary, wages, bonuses, overtime, pension benefits, payment for vacation you didn't take and pay in lieu of notice are not retiring allowances. Pay in lieu of notice is employment income: your employer deducts CPP contributions, EI premiums and income tax from it, working out the tax the same way as for a [bonus](https://taxnotes.ca/guides/bonuses/).

Your retiring allowance appears on your T4 slip, split into an eligible part (box 66) and a non-eligible part (box 67). Report the full amount on your return as other income (line 13000).

## How much tax comes off

Your employer withholds income tax from any part of a retiring allowance paid to you directly, at lump-sum rates set by the size of the payment:

- 10% on amounts up to $5,000
- 20% on amounts over $5,000 up to $15,000
- 30% on amounts over $15,000

The employer picks the rate from all the retiring allowance payments it has paid or expects to pay you in the calendar year. The rates combine federal and provincial tax; in Quebec they're federal tax only (5%, 10% and 15%), and Revenu Québec sets the rules for Quebec tax. No CPP contributions or EI premiums are taken off a retiring allowance.

Tax is withheld even if your income for the year is below the amount you claimed on your TD1 form, and you may still owe more when you file. If you ask, your employer can instead work out the tax on your year's pay with and without the lump sum, and withhold the difference.

## Moving severance into an RRSP

**The eligible part (service before 1996).** It's $2,000 for each year or part-year you worked for the employer (or a person related to the employer) before 1996, plus $1,500 for each year or part-year before 1989 in which you earned no pension or deferred profit-sharing plan benefits from employer contributions that were vested in you. You can transfer this part to your own RRSP or registered pension plan (or a PRPP or SPP) whatever your unused RRSP room, and a transfer to an RRSP doesn't reduce your deduction limit. It can't go into a spousal RRSP, or into an RRSP if you were over 71 at the end of the year. If your employer transfers it directly, no tax is withheld.

**The non-eligible part.** You can contribute it to your own RRSP or a spousal or common-law partner RRSP, but only up to your available RRSP deduction limit. Your employer may send it straight to the RRSP without withholding tax if you tell them how much room you have. If you take it in cash, tax is withheld and you contribute it yourself. To deduct it for the year you got the allowance, contribute during that year or within 60 days after it ends.

Either way, you report the whole retiring allowance as income and claim a deduction for the amount transferred or contributed (for an RRSP, using Schedule 7). See [RRSP basics](https://taxnotes.ca/guides/rrsp-basics/) for how your deduction limit works.

## EI benefits are taxable

EI benefits are taxable income in the year they're paid, even if your claim started the year before. Tax is taken off each payment, and your T4E slip shows the benefits paid and the tax deducted. If you live in Quebec on December 31, you get a T4E(Q) with an extra copy for your Quebec return.

If you expect to owe tax at filing time, you can ask Service Canada to take more tax off each EI payment.

## Paying back EI at tax time

Higher earners may have to repay part of their EI benefits on their return, when all of these are true:

- box 15 of your T4E (regular and other benefits) shows an amount
- box 7 shows a repayment rate of 30%
- your net income, after a few adjustments, is above the repayment threshold for the year

The repayment chart on your T4E works out the amount, and it's added to what you owe on your return (line 23500 shows it). Repaying an overpayment is different: if you paid excess benefits back directly, box 30 of your T4E shows it and you deduct it (line 23200).

## In short

- Severance is taxed as a retiring allowance; pay in lieu of notice is employment income.
- Withholding may not cover your tax, so set money aside or ask for more to be withheld. The [income tax calculator](https://taxnotes.ca/calculators/income-tax/) shows what a lump sum does to your tax.
- Service before 1996 lets you move part of your severance into your RRSP without using room; the rest needs RRSP room.
- EI is taxable, and higher earners may have to repay some of it. Keep your T4 and T4E slips.

## Sources

1. [Employers' Guide – Payroll Deductions and Remittances (T4001): Retiring allowances](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4001/employers-guide-payroll-deductions-remittances.html) (canada.ca)
2. [Transferring the eligible part of a retiring allowance](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/transferring/transferring-eligible-part-a-retiring-allowance.html) (canada.ca)
3. [Transferring the non-eligible part of a retiring allowance](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/transferring/transferring-non-eligible-part-a-retiring-allowance.html) (canada.ca)
4. [Employment Insurance tax information](https://www.canada.ca/en/employment-social-development/programs/ei/ei-list/tax-slips-itemized.html) (canada.ca)
5. [T4E slip: Statement of Employment Insurance and Other Benefits](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/tax-slips/understand-your-tax-slips/t4-slips/t4e-statement-employment-insurance-other-benefits.html) (canada.ca)
6. [Line 23500 – Social benefits repayment](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-23500-social-benefits-repayment.html) (canada.ca)

Tax figures in this guide come from the TaxNotes.ca rates tables (https://taxnotes.ca/rates/), which cite the Canada Revenue Agency and, for Quebec, Revenu Québec.

Last reviewed: October 10, 2026

How to cite: "Losing your job: severance, retiring allowances and EI", TaxNotes.ca, last reviewed 2026-10-10, https://taxnotes.ca/guides/losing-your-job/. For a figure or rule, also cite the official source listed above.

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