How is income tax calculated on severance pay in Ontario?
In Ontario, severance pay is considered income and is taxable. Just how much tax you have to pay depends on several factors, and there are some things you can do to reduce the tax hit.DefinitionAccording to the Ministry of Revenue–the body responsible for collecting taxes in Ontario–severance pay is “(the) amount paid based on length of service that is payable to an employee upon termination of employment.” The federal Canada Revenue Agency further defines it as a “retirement allowance.”Considered IncomeAs it is considered income, severance pay is therefore subject to personal income tax in Ontario, both at the provincial and federal level. Your income for that year determines the actual amount of taxes you will owe. However, there is some good news: Severance pay is not subject to Ontario’s Employer Health Tax.Federal Tax RatesFederal income tax in Canada is calculated on a graduated scale. The rates for 2010 are 15 percent on the first $40,970 of taxable income; plus 22 percent on
