Vacation Pay – How to Shelter it From Taxation

Vacation pay is an important consideration with job termination that can add up to a substantial amount of money. Depending on your current income level and your length of service at your employer, a few weeks of vacation pay can easily attract the top level of taxation. This means you can easily lose half your vacation pay away to taxation. Some employers will give you the option of receiving your pay over x number of weeks verses a lump sum payout.

One solution for sheltering your vacation pay out from taxation is to have your pay put directly into your Registered Retirement Savings Plan. (R. R. S. P. ). To perform this transfer you must have the contribution room. his is a simply process that is offered to most member who are terminated from employment. If it is not listed as an option in your termination papers you may simply have to ask your human resource contact person for it.

To perform this transfer requires you to know a couple important items of information. The first item of information is to find out if you have enough room to transfer your vacation pay to your R. R. S. P?

This information can be found on your last notice of assessment you received when you filed your last tax return. Be aware that over contributions would be penalized at a significant rate.

Your written financial plan should take into account the possibility of job loss and how to shelter your possible vacation pay from taxation. Think about this before you decide to fully top up your RRSP contribution limit as it may force you to take your vacation pay as income in a lump sum which could cost you thousands of dollars in unnecessary taxation.

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