Financial Planning Q 'n A

What are the tax consequences of my severance package?

Ordinarily, an amount received on account of severance is income in the year you receive it. In certain cases, you may apply to have the income taxed in the years for which the payment applies instead of the year you receive it if there is a potential tax benefit. You may also be able to transfer all or a portion of the funds directly to an RRSP over and above your normal limits. The amount that can be transferred is $2,000 for each year or part of service before 1996 plus and additional $1,500 for each year or part year of service before 1989 of service. If you incurred legal fees to obtain your severance, they are deductible against the severance payments. If part of your settlement includes damages for mental anguish, humiliation, hurt feelings or a loss of self respect, these payments if detailed may not be taxable at all.