Lump Sum Tax Rates – Explained

Lump sum payments refer to a one-time, single payment made for a specific purpose, often as part of a financial transaction or agreement. These payments can take various forms and serve different purposes.

When to use lump sum tax rates

Retiring Allowances

A retiring allowance (also called “severance pay”) is an amount paid to an employee on:

• loss of employment; or
• retirement (in this case, the amount must be paid on or after the employee’s retirement, in recognition of the employee’s long service).

A retiring allowance can be an amount refunded for sick leave accumulated but not used before the employee’s resignation or retirement, an amount paid for damages plus interest, or an indemnity in lieu of notice.

Income tax must be deducted from a retiring allowance unless it is paid directly into a registered retirement savings plan (RRSP) or a registered pension plan (RPP).

Payments from Retirement Investments

Income tax must be deducted from lump-sum payments that are:

• from a registered retirement savings plan (RRSP) or a plan referred to in subsection 146(12) of the Income Tax Act as an amended plan
• from a registered pension plan (RPP)
• from a deferred profit-sharing plan (DPSP)
• more than the minimum amount you have to pay to an annuitant under a registered retirement income fund (RRIF)
  
  

How to determine which tax rate is applicable

Lump sum tax rates for all provinces, except Quebec:

Combine all lump-sum payments that have been paid, or expect to pay, in the calendar year when determining the composite rate to use.

Lump sum tax rates for Quebec only:

The federal and provincial tax rates are determined based on single lump sum payments (at the time of issuance).