Severance pay in Quebec: what you keep after tax

Losing your job often comes with a cheque: severance pay. But between the figure on the letter and what lands in your account, tax gets in the way — and not quite the way it does on a regular paycheque. Here, in plain terms, is what you actually keep in Quebec.

To the tax authorities, it is a "retiring allowance"

The term is odd, but it is the official one. A retiring allowance is, according to the Canada Revenue Agency, an amount paid to an employee on the loss of their job or in recognition of their years of service. Your severance for a layoff qualifies, and so does the payout of unused sick leave you receive on your way out.

First consequence, simple but heavy: this amount is fully taxable in the year you receive it. It is added on top of your other income for the year.

Good news: no QPP, no Employment Insurance

On a normal salary, your employer withholds three contributions: the QPP (Quebec Pension Plan, which funds your future retirement pension), Employment Insurance (EI) and the QPIP (Quebec Parental Insurance Plan). On severance pay, none of the three.

The Canada Revenue Agency is explicit: on a retiring allowance, the employer withholds neither pension plan contributions nor Employment Insurance premiums. The QPIP follows the same logic — it is levied on wages, and severance pay is not wages.

The gap is not trivial: on a regular paycheque, these three contributions come to nearly 8% of gross pay up to the ceilings. Here, they do not apply. What is left to settle is income tax.

What your employer withholds is only an advance

Your employer still withholds tax at source, but at fixed rates, called "lump-sum" rates. For a Quebec resident, the federal portion follows this table, based on the total amount of the severance:

These are the rates the CRA publishes for retiring allowances. Elsewhere in Canada they are twice as high (10%, 20%, 30%): Quebec applies a reduced federal portion because it collects its own provincial withholding, which is added on top.

Above all, remember one thing: this deduction is an advance, not the final amount of your tax.

The real tax is worked out at your marginal rate

When you file your return, the severance is added to your other income for the year, and the whole is taxed bracket by bracket. The rate that matters then is your marginal rate: the one that hits the last dollar earned, so every dollar of severance stacked on top of your salary.

In Quebec, this marginal rate adds federal tax to provincial tax (with the federal portion cut by a 16.5% abatement, a rebate specific to Quebec). It climbs fast: starting from the 2026 federal brackets combined with the Quebec brackets, it sits around 36% for income between $58,500 and $108,700, and reaches close to 53% in the top bracket.

That is where the surprise lies. If your employer withheld 15% federally and your real marginal rate is 36%, you will settle the gap when you file. Conversely, if your income for the year is low, you could get some of it back. To tell the two ideas apart, read our article on the marginal rate and the average rate.

Cutting the bill: transferring to an RRSP

The most effective way to defer the tax is to move the severance into an RRSP rather than cashing it.

Two cases arise. Part of it can sometimes be transferred directly, with no tax withheld at all: the "eligible" part, worth $2,000 per year of service before 1996, plus $1,500 per year before 1989 for which you had no vested rights in a pension plan. Be clear-eyed: if you started working after 1995, this eligible part is nil — it only concerns long careers.

For the rest — the "non-eligible" part — there is no special regime, but if you have unused RRSP contribution room, putting your severance there lowers your taxable income for the year by the same amount. The tax is not erased, it is deferred to a future withdrawal, often at a lower rate.