Teacher in Newfoundland with $120K Severance: Sabbatical Leave Plan and TFSA vs RRSP Priority in 2026
Key Takeaways
- 1Understanding teacher in newfoundland with $120k severance: sabbatical leave plan and tfsa vs rrsp priority in 2026 is crucial for financial success
- 2Professional guidance can save thousands in taxes and fees
- 3Early planning leads to better outcomes
- 4GTA residents have unique considerations for severance planning
- 5Taking action now prevents costly mistakes later
Quick Summary
This article covers 5 key points about key takeaways, providing essential insights for informed decision-making.
Quick Answer
A $120,000 severance paid as a lump sum to a Newfoundland teacher triggers 30% federal withholding ($36,000) at source, depositing roughly $84,000. In the severance year, combined income from salary plus severance likely pushes into the 38–43% combined federal-provincial marginal range — making RRSP contributions extremely valuable at 38+ cents on the dollar. But the following sabbatical year flips the priority: with income dropping to EI-only levels (maximum $728/week for 14–45 weeks depending on the St. John's regional unemployment rate), your marginal rate falls to approximately 20–25%. That low-income year is when TFSA shines — withdrawals are invisible to the CRA, they don't reduce EI or other income-tested benefits, and you have up to $109,000 of cumulative TFSA room available in 2026 if you've never contributed. The optimal sequence: max RRSP in the severance year to shelter income at the highest marginal rate you'll see for years, then live off TFSA withdrawals during the sabbatical to keep taxable income near zero.
Talk to a CFP — free 15-min call
If your severance landed in the past 90 days and you haven't modelled the RRSP-vs-TFSA split against your sabbatical timeline, book a free 15-minute severance planning call with our team. We'll map the tax brackets across both years before the window closes.
The Scenario: 43-Year-Old Newfoundland Teacher, $120K Severance, One-Year Sabbatical Ahead
Sarah teaches Grade 10 social studies at a high school outside St. John's. She's 43, has been with the school district for 16 years, and earns $85,000 base salary. In February 2026, the district restructures and her position is eliminated. The separation package: $120,000 in severance paid as a lump sum, plus $3,200 in accrued vacation.
Rather than immediately job-hunting, Sarah plans a one-year sabbatical — time to recharge, finish a graduate certificate she's been putting off, and return to teaching in September 2027 at a different school board. Her financial picture going into the layoff: $62,000 in her RRSP, $0 in her TFSA (she's never opened one), $18,000 in a non-registered savings account, a paid-off car, and a home in Mount Pearl worth approximately $380,000 with $140,000 remaining on the mortgage at 4.2%.
Her employer withheld $36,000 in federal tax at the mandatory 30% lump-sum rate, depositing $84,000. Combined with the vacation payout (roughly $2,400 after payroll deductions), Sarah has approximately $86,400 in hand. Her monthly fixed costs run $3,800 — mortgage, utilities, groceries, insurance. The $86,400 covers roughly 23 months of bare-bones living. The question is whether to park it all in a savings account and ride it out, or deploy it strategically across registered accounts to capture a tax advantage she won't see again.
Why the Severance Year Is the Highest-Leverage Tax Window of Your Career
Sarah's 2026 income before any deductions: $40,000 in salary earned January through mid-February, plus $120,000 severance, plus $3,200 vacation payout. Total: approximately $163,200. At that combined federal-Newfoundland income level, her marginal tax rate lands in the 38–43% range — substantially higher than her normal teaching-salary bracket of approximately 30–35% on $85,000.
Every dollar of RRSP contribution claimed against this income saves 38–43 cents in current-year tax. Next year, during the sabbatical, her income drops to EI benefits only — maximum $728/week for however many weeks she qualifies (14–45 weeks depending on the regional Newfoundland unemployment rate). On that EI-only income, her marginal rate falls to approximately 20–25%.
This is the bracket arbitrage that makes the severance year so powerful: deduct at 38–43%, eventually withdraw in retirement at a lower rate. The gap between the deduction rate and the future withdrawal rate is pure savings. On a $40,000 RRSP contribution, the spread is worth $5,200–$7,200 in permanent tax reduction compared to contributing in a normal $85,000 salary year.
RRSP First in the Severance Year: The Math
Sarah's CRA Notice of Assessment shows $48,000 in unused RRSP contribution room as of January 1, 2026. She's been contributing roughly $8,000–$10,000 per year against a room generation of approximately $15,300 (18% of $85,000), so the gap has accumulated over a decade of teaching.
The contribution math at her severance-year marginal rate:
- Contribute $40,000 to RRSP: Reduces 2026 taxable income from $163,200 to $123,200
- Tax saving at approximately 40% blended marginal rate: roughly $16,000 in current-year tax reduction
- Net cost of the contribution: $40,000 − $16,000 = $24,000 out of pocket
- April 2027 refund: The $36,000 federal withholding on the severance, minus her actual tax liability after the RRSP deduction, produces a refund estimated at $18,000–$22,000
That refund arrives in May 2027 — precisely when the sabbatical year cash starts running thin. It extends Sarah's runway by 5–6 months at her $3,800/month burn rate, without touching her invested capital.
The strategic error that costs $16,000: making no RRSP contribution and paying full freight on the entire $163,200 at the elevated marginal rate. The $40,000 sitting in a savings account at 4.5% earns roughly $1,800 in a year — taxable. The same $40,000 in an RRSP generates a $16,000 refund immediately. The RRSP wins by a factor of nine in year one alone.
TFSA Takes Over During the Sabbatical: Here's Why
Once the severance year ends and Sarah enters her sabbatical in 2027, the RRSP deduction loses its punch. Her 2027 income is EI benefits — perhaps $25,000–$35,000 depending on duration and regional qualifying weeks. At that income level, an RRSP contribution deduction saves only 20–25 cents per dollar. That's a bad deal when the same money could go into a TFSA and grow tax-free forever.
More importantly, Sarah needs to spend during the sabbatical, not save. And where she draws from matters enormously:
| Withdrawal source | Tax consequence in sabbatical year | Impact on EI |
|---|---|---|
| TFSA | $0 — completely invisible to the CRA | None — not counted as income |
| Non-registered savings | Interest earned is taxable; capital gains are 50% included on first $250K | Investment income may reduce EI if it pushes net income above thresholds |
| RRSP withdrawal | Fully taxable as ordinary income — adds $2,500–$3,000 in tax per $10,000 even at the sabbatical-year bracket | Counted as income — can reduce EI benefits and trigger clawback |
Sarah has $109,000 of cumulative TFSA room in 2026 (she turned 18 in 2001 and has been a Canadian resident since the TFSA launched in 2009). She has never contributed. If she moves $30,000–$40,000 of her severance proceeds into a TFSA in the severance year, she builds a tax-free bridge for the sabbatical: withdrawals from the TFSA during 2027 create zero taxable income, don't affect her EI eligibility, and the contribution room restores on January 1, 2028.
This is the core insight most severance recipients miss: RRSP and TFSA aren't competitors — they're sequenced. RRSP dominates in the high-income year. TFSA dominates as the spending vehicle in the low-income year. Using them in the wrong order costs thousands.
The Optimal $120K Deployment for a Sabbatical-Bound Teacher
| Bucket | Amount | Rationale |
|---|---|---|
| RRSP contribution (severance year) | $40,000 | Shelters income at 38–43%, generates ~$16,000 refund |
| TFSA contribution (sabbatical bridge) | $30,000 | Tax-free withdrawals during sabbatical; 8 months of living expenses |
| Emergency fund (HISA) | $14,400 | ~4 months of fixed costs as cash buffer |
| Total deployed from net proceeds | $84,400 | ~98% of net severance productively allocated |
The April 2027 tax refund of $18,000–$22,000 then replenishes the emergency fund and extends the sabbatical runway through September 2027 when Sarah returns to a classroom. Total productive deployment: over 95% of the gross severance either sheltered or positioned for tax-free growth.
EI Timing: Why the Allocation Period Changes Everything
Service Canada treats lump-sum severance as salary continuation, applying an allocation period that delays EI:
- Sarah's normal weekly earnings: approximately $1,635 ($85,000 ÷ 52)
- Severance: $120,000
- Allocation: $120,000 ÷ $1,635 ≈ 73 weeks
- Plus 1-week mandatory waiting period
- EI start: approximately June 2027 — 74 weeks after the February 2026 separation
For a teacher planning a one-year sabbatical with a September 2027 return, EI benefits would begin just three months before the new job starts — if they arrive at all. The maximum weekly benefit in 2026 is $728 (55% of insurable earnings capped at the $68,900 MIE). Duration in Newfoundland depends on the regional unemployment rate and qualifying hours, ranging from 14 to 45 weeks.
The practical takeaway: plan your sabbatical cash flow as if EI pays nothing for the first 18 months. If it arrives, treat it as a bonus that replenishes your TFSA or pays down the mortgage — not a pillar of the plan.
Apply for EI immediately anyway. The clock on the benefit period starts the day you file, not the day benefits begin paying. Filing on the first business day after separation locks in the 2026 insurable earnings calculation. Waiting until the allocation expires risks recalculation at different rates.
The Retiring Allowance Trap: Why Section 60(j.1) Won't Help
Under Section 60(j.1) of the Income Tax Act, a retiring allowance can be rolled into an RRSP without using contribution room — but only for pre-1996 service years ($2,000/year, plus $1,500/year for pre-1989 service without pension vesting). Sarah started teaching in 2010. Every year of service is post-1996. Her eligible rollover is exactly $0.
This rule primarily benefits long-tenured public sector employees who started before 1996 — a retiring school principal with 30 years of service starting in 1990 would have 6 qualifying years × $2,000 = $12,000 of rollover room. For teachers in their 40s and younger, the retiring allowance rollover is irrelevant. The regular RRSP contribution using existing room is the only available shelter.
For a deeper walkthrough of the retiring-allowance mechanics and edge cases, see our Section 60(j.1) retiring allowance guide.
Newfoundland Estate Context: $6,000 Probate on $1M
While estate planning isn't the first priority during a severance event, the registered-account decisions Sarah makes now carry long-term consequences. Newfoundland and Labrador charges approximately $6,000 in probate fees on a $1M estate ($60 base on the first $1,000, then $6 per $1,000 above). That's mid-range nationally — cheaper than Ontario ($14,250) or Nova Scotia (~$16,500), but far more than Alberta's capped $525 or Manitoba's $0.
The key move: name beneficiaries on every registered account. RRSPs, RRIFs, and TFSAs with named beneficiaries bypass the estate entirely and avoid probate. Sarah's $62,000 RRSP and the new $30,000 TFSA — if she names her sister as beneficiary — reduce the eventual probatable estate by $92,000, saving roughly $550 in NL probate fees. Small individually, but it compounds across a lifetime of growing account balances.
Common Mistakes That Cost $10,000+ on a Teacher Severance
The patterns repeat across every teacher severance file we see:
- No RRSP contribution in the severance year: Foregoes ~$16,000 in tax savings. The $40,000 sits in a savings account earning 4.5% ($1,800/year, taxable) instead of generating an immediate $16,000 refund. Cost over the sabbatical period: $14,200.
- Withdrawing from RRSP during the sabbatical: Every $10,000 RRSP withdrawal when EI is flowing adds $2,500–$3,000 in tax and may trigger EI clawback. The same $10,000 from a TFSA costs nothing. Cost per $10,000: $2,500–$3,000.
- Treating the severance as a windfall: Spending $20,000–$30,000 on a car, a trip, or a home renovation converts compounding capital into immediate consumption. At 6% annual growth, $25,000 invested today becomes approximately $33,500 in five years. Spent, it becomes $0.
- Waiting to "figure things out" and missing the RRSP deadline: The March 3, 2027 deadline to contribute against 2026 income arrives fast. Teachers who park the cash and defer the decision until summer lose the highest-leverage deduction window of their career.
- Not opening a TFSA at all: A 43-year-old with $109,000 of unused room is leaving the most flexible account in the Canadian tax system entirely empty. Even $30,000 contributed now and left to compound tax-free for 22 years to age 65 at 6% grows to approximately $108,000 — all withdrawn tax-free.
Five-Year Compound Comparison: Deployed vs. Parked
The deployment decision in the first 90 days sets the trajectory for the next five years and beyond. Assuming a 6% average annual return on a balanced portfolio:
| Strategy | Invested amount | Value in 5 years |
|---|---|---|
| $40K RRSP + $30K TFSA (recommended) | $70,000 | ~$93,700 (tax-deferred/tax-free) |
| $70K in HISA at 4.5% | $70,000 | ~$87,200 (pre-tax on interest) |
| $70K spent on car + trip + reno | $0 | $0 |
The recommended deployment produces approximately $93,700 in registered accounts after five years — and the TFSA portion is entirely tax-free on withdrawal. Add the $16,000 RRSP refund reinvested, and the total wealth advantage over parking everything in cash exceeds $20,000 by 2031.
The Sabbatical Cash-Flow Timeline
Mapping the money month by month keeps the sabbatical on track:
- February–March 2026 (severance month): Receive $84,000 net. Contribute $40,000 to RRSP and $30,000 to TFSA immediately. Park $14,400 in HISA as emergency buffer.
- April–December 2026 (sabbatical months 1–9): Draw $3,800/month from TFSA for living expenses. After 8 months, the $30,000 TFSA bridge is spent. Remaining $14,400 HISA covers month 9.
- January–April 2027 (months 10–13): File 2026 T1 in February. Refund of $18,000–$22,000 arrives March–May. This funds months 10–15.
- May–September 2027 (months 14–18): Refund proceeds carry through to September return-to-work. EI may begin paying around June 2027 — if so, the $728/week supplements the final stretch.
Total sabbatical funded: 18+ months without touching the RRSP, without withdrawing from investments, and without adding to the mortgage. The $40,000 RRSP contribution stays invested and compounds toward retirement. The TFSA room regenerates on January 1, 2028, ready for re-contribution once teaching income resumes.
Talk to a CFP — free 15-min call
If you're a teacher or public-sector employee holding a severance package and planning time off before your next role, the RRSP-vs-TFSA sequencing across two tax years is the highest-leverage decision in the file. Book a free 15-minute call with our severance planning team — we'll model the bracket arbitrage using your actual Notice of Assessment numbers and map the cash-flow timeline month by month.
For a province-by-province comparison of severance tax treatment and the full EI allocation playbook, see our severance planning service page.
Key Takeaways
- 1A $120,000 Newfoundland teacher severance triggers 30% federal withholding ($36,000) at source, but combined federal-NL tax at the $160K income level runs 38–43% — expect an additional $5,000–$10,000 owing in April 2027 unless RRSP deductions bring taxable income down
- 2RRSP contributions in the severance year save 38–43 cents per dollar at the elevated marginal rate — a $40,000 contribution generates a $15,200–$17,200 refund that directly funds the sabbatical bridge
- 3During the low-income sabbatical year, TFSA becomes the priority vehicle: withdrawals create zero taxable income, don't reduce EI benefits, and the cumulative room of $109,000 in 2026 gives substantial capacity for a 43-year-old who has never contributed
- 4EI benefits are delayed by the severance allocation period — a $120,000 severance on $85,000 annual salary creates roughly 73 weeks of allocation, pushing EI start well past the one-year sabbatical mark
- 5Newfoundland probate runs approximately $6,000 on a $1M estate — mid-range among provinces, and reducible by naming beneficiaries on registered accounts rather than routing them through the will
Quick Summary
This article covers 5 key points about key takeaways, providing essential insights for informed decision-making.
Frequently Asked Questions
Q:How is a $120,000 teacher severance taxed in Newfoundland in 2026?
A:A $120,000 lump-sum severance is treated as ordinary employment income on the T1 return. The employer withholds federal tax at the lump-sum rate: 30% on amounts above $15,000, producing approximately $36,000 in withholding. Newfoundland provincial tax is not withheld at source on lump-sum payments — the province collects its share when the T1 is filed in April 2027. If the teacher earned $40,000 in regular salary before the severance, total 2026 income before deductions is $160,000. At that income level, the combined federal-Newfoundland marginal rate is in the 38–43% range, meaning the actual tax on the severance portion exceeds the $36,000 withheld. Without RRSP deductions or other sheltering, expect an additional $5,000–$10,000 owing in April 2027.
Q:Should a teacher on sabbatical prioritize TFSA or RRSP contributions?
A:It depends on which year you are asking about. In the severance year (high income from salary + $120K lump sum), RRSP contributions are the priority — every dollar contributed saves 38–43 cents in tax at the elevated marginal rate. In the sabbatical year, when income drops to EI levels or near zero, RRSP contributions become almost worthless because the deduction only saves 20–25 cents on the dollar at the lower bracket. During the sabbatical, TFSA is the better vehicle: contributions grow tax-free, withdrawals create no taxable income, and they don't affect EI or GIS calculations. The sequence matters — RRSP in the high-income year, TFSA for the low-income bridge.
Q:How much TFSA room does a 43-year-old have in 2026?
A:A Canadian resident who turned 18 in 2001 or earlier and has been a resident since the TFSA launched in 2009 has cumulative TFSA room of $109,000 as of 2026. This assumes zero prior contributions. The annual limit has been $7,000 since 2024. If the teacher has been contributing regularly, their available room is $109,000 minus total lifetime contributions plus any withdrawals from prior years (which restore room on January 1 of the following year). Check your CRA My Account for the exact figure — the CRA tracks cumulative room automatically.
Q:How long is the EI waiting period after a lump-sum severance in Newfoundland?
A:Service Canada treats a lump-sum severance as salary continuation and applies an allocation period that delays EI benefits. The allocation is calculated by dividing the severance by normal weekly earnings. For a teacher earning approximately $85,000 annually ($1,635/week), a $120,000 severance creates an allocation of roughly 73 weeks — meaning EI benefits would not start until more than a year after the layoff date, plus the standard 1-week unpaid waiting period. For teachers on a planned sabbatical, this often means EI overlaps with the return-to-work timeline. Apply for EI immediately regardless — the filing date locks in your insurable earnings and benefit period calculations.
Q:Can a Newfoundland teacher roll severance into an RRSP without using contribution room?
A:Only the portion qualifying as a retiring allowance for pre-1996 service years can bypass RRSP room. Under Section 60(j.1) of the Income Tax Act, the rollover is $2,000 per year of service before 1996, plus $1,500 per pre-1989 year without pension vesting. A 43-year-old teacher in 2026 was born in 1983 and started working no earlier than approximately 2005 — all service years are post-1996. The eligible retiring-allowance rollover is $0. However, the teacher can make regular RRSP contributions using accumulated room and claim the deduction against severance-year income. With the 2026 annual RRSP limit at $33,810 and potentially years of unused room, a $30,000–$50,000 RRSP contribution from the after-tax severance proceeds can generate a $12,000–$20,000 tax refund.
Q:What is Newfoundland probate on a $1M estate?
A:Newfoundland and Labrador charges a $60 base fee on the first $1,000 of estate value, then $6 per $1,000 above that ($0.60 per $100). On a $1,000,000 estate, probate fees are approximately $6,000. This is mid-range among Canadian provinces — lower than Ontario ($14,250) and Nova Scotia (~$16,500), but substantially higher than Alberta (capped at $525) or Manitoba ($0). For a teacher whose primary estate assets are a home, RRSP/RRIF, and TFSA, naming beneficiaries on registered accounts and holding property in joint tenancy can reduce the assets passing through probate and lower the fee.
Q:How does a one-year sabbatical affect the RRSP deduction strategy?
A:A sabbatical creates two distinct tax years: the pre-sabbatical year (high income from salary plus severance) and the sabbatical year (low or zero earned income). RRSP contributions can be made in either year, but the deduction should be claimed against the highest-income year. If the teacher contributes to the RRSP during the sabbatical year, they can carry the deduction forward and claim it against a future high-income year when they return to work. However, the most valuable move is contributing in the severance year itself and claiming the deduction immediately — sheltering $40,000 at a 38–43% marginal rate produces a $15,200–$17,200 refund that directly funds living expenses during the sabbatical.
Q:What are the biggest financial mistakes teachers make with severance before a sabbatical?
A:Three errors dominate. First, leaving the entire $120,000 in a savings account and taking no RRSP deduction in the severance year — this hands $15,000+ to the CRA that could have been sheltered. Second, withdrawing from the RRSP during the sabbatical when TFSA withdrawals would create zero taxable income. Every $10,000 RRSP withdrawal during a year with even $20,000 of EI income adds approximately $2,500–$3,000 in tax, while the same spending from a TFSA costs nothing. Third, not applying for EI immediately after separation. Even though the severance allocation delays benefits by months, the filing date anchors the benefit calculation. Teachers who wait until the allocation period ends to file risk losing weeks of entitlement and may face recalculation at less favorable rates.
Question: How is a $120,000 teacher severance taxed in Newfoundland in 2026?
Answer: A $120,000 lump-sum severance is treated as ordinary employment income on the T1 return. The employer withholds federal tax at the lump-sum rate: 30% on amounts above $15,000, producing approximately $36,000 in withholding. Newfoundland provincial tax is not withheld at source on lump-sum payments — the province collects its share when the T1 is filed in April 2027. If the teacher earned $40,000 in regular salary before the severance, total 2026 income before deductions is $160,000. At that income level, the combined federal-Newfoundland marginal rate is in the 38–43% range, meaning the actual tax on the severance portion exceeds the $36,000 withheld. Without RRSP deductions or other sheltering, expect an additional $5,000–$10,000 owing in April 2027.
Question: Should a teacher on sabbatical prioritize TFSA or RRSP contributions?
Answer: It depends on which year you are asking about. In the severance year (high income from salary + $120K lump sum), RRSP contributions are the priority — every dollar contributed saves 38–43 cents in tax at the elevated marginal rate. In the sabbatical year, when income drops to EI levels or near zero, RRSP contributions become almost worthless because the deduction only saves 20–25 cents on the dollar at the lower bracket. During the sabbatical, TFSA is the better vehicle: contributions grow tax-free, withdrawals create no taxable income, and they don't affect EI or GIS calculations. The sequence matters — RRSP in the high-income year, TFSA for the low-income bridge.
Question: How much TFSA room does a 43-year-old have in 2026?
Answer: A Canadian resident who turned 18 in 2001 or earlier and has been a resident since the TFSA launched in 2009 has cumulative TFSA room of $109,000 as of 2026. This assumes zero prior contributions. The annual limit has been $7,000 since 2024. If the teacher has been contributing regularly, their available room is $109,000 minus total lifetime contributions plus any withdrawals from prior years (which restore room on January 1 of the following year). Check your CRA My Account for the exact figure — the CRA tracks cumulative room automatically.
Question: How long is the EI waiting period after a lump-sum severance in Newfoundland?
Answer: Service Canada treats a lump-sum severance as salary continuation and applies an allocation period that delays EI benefits. The allocation is calculated by dividing the severance by normal weekly earnings. For a teacher earning approximately $85,000 annually ($1,635/week), a $120,000 severance creates an allocation of roughly 73 weeks — meaning EI benefits would not start until more than a year after the layoff date, plus the standard 1-week unpaid waiting period. For teachers on a planned sabbatical, this often means EI overlaps with the return-to-work timeline. Apply for EI immediately regardless — the filing date locks in your insurable earnings and benefit period calculations.
Question: Can a Newfoundland teacher roll severance into an RRSP without using contribution room?
Answer: Only the portion qualifying as a retiring allowance for pre-1996 service years can bypass RRSP room. Under Section 60(j.1) of the Income Tax Act, the rollover is $2,000 per year of service before 1996, plus $1,500 per pre-1989 year without pension vesting. A 43-year-old teacher in 2026 was born in 1983 and started working no earlier than approximately 2005 — all service years are post-1996. The eligible retiring-allowance rollover is $0. However, the teacher can make regular RRSP contributions using accumulated room and claim the deduction against severance-year income. With the 2026 annual RRSP limit at $33,810 and potentially years of unused room, a $30,000–$50,000 RRSP contribution from the after-tax severance proceeds can generate a $12,000–$20,000 tax refund.
Question: What is Newfoundland probate on a $1M estate?
Answer: Newfoundland and Labrador charges a $60 base fee on the first $1,000 of estate value, then $6 per $1,000 above that ($0.60 per $100). On a $1,000,000 estate, probate fees are approximately $6,000. This is mid-range among Canadian provinces — lower than Ontario ($14,250) and Nova Scotia (~$16,500), but substantially higher than Alberta (capped at $525) or Manitoba ($0). For a teacher whose primary estate assets are a home, RRSP/RRIF, and TFSA, naming beneficiaries on registered accounts and holding property in joint tenancy can reduce the assets passing through probate and lower the fee.
Question: How does a one-year sabbatical affect the RRSP deduction strategy?
Answer: A sabbatical creates two distinct tax years: the pre-sabbatical year (high income from salary plus severance) and the sabbatical year (low or zero earned income). RRSP contributions can be made in either year, but the deduction should be claimed against the highest-income year. If the teacher contributes to the RRSP during the sabbatical year, they can carry the deduction forward and claim it against a future high-income year when they return to work. However, the most valuable move is contributing in the severance year itself and claiming the deduction immediately — sheltering $40,000 at a 38–43% marginal rate produces a $15,200–$17,200 refund that directly funds living expenses during the sabbatical.
Question: What are the biggest financial mistakes teachers make with severance before a sabbatical?
Answer: Three errors dominate. First, leaving the entire $120,000 in a savings account and taking no RRSP deduction in the severance year — this hands $15,000+ to the CRA that could have been sheltered. Second, withdrawing from the RRSP during the sabbatical when TFSA withdrawals would create zero taxable income. Every $10,000 RRSP withdrawal during a year with even $20,000 of EI income adds approximately $2,500–$3,000 in tax, while the same spending from a TFSA costs nothing. Third, not applying for EI immediately after separation. Even though the severance allocation delays benefits by months, the filing date anchors the benefit calculation. Teachers who wait until the allocation period ends to file risk losing weeks of entitlement and may face recalculation at less favorable rates.
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