Everything You Need to Know About Lump Sums

Start investing

Danielle Kubes is a trained journalist and investor who has written about personal finance for the past six years. Her writing has been published in The Globe and Mail, National Post, MoneySense, Vice and RateHub.ca. Danielle writes about investing and personal finance for Wealthsimple. She has a Bachelor of Humanities from Carleton University and a Master of Journalism from Ryerson University.

Sometimes you get a little bit of money over time, and sometimes you get a huge chunk at once. That huge chunk is called a “lump sum.” While a windfall of cash can seem like TK, there can sometimes be serious tax consequences and other drawbacks that result. Often Canadians aren’t sure how to order their priorities and figure out how to spend the money wisely. They may start spending lavishly on consumer items or fall for “hot stock tips” from their barber’s nephew. The money can easily disappear as suddenly as it came in.

But that’s the worst-case scenario. If you manage a lump sum wisely, you can pay off your debts, build a savings account, and start an investment portfolio that will build you a nest egg over the long term.

We always suggest getting the advice of a fee-only financial advisor if the lump sum you receive is a significant amount.

Wealthsimple offers an automated way to grow your money like the world's most sophisticated investors. Get started and we'll build you a personalized investment portfolio in a matter of minutes.

What is a lump sum?

A lump sum is when you get a large amount of money at one time. Sources of lump sums often come from:

  • A settlement payment from a lawsuit

  • Inheritance of money or real estate

  • Payment for seasonal work or for completing a special work assignment

  • Lump Sum Disability Award if you are a veteran

  • Winning the lottery or other contest

  • Severance payment if you lose your job

  • Life insurance payout

  • Death benefits if you’re named as the beneficiary for an employee who died after retiring

Many recipients of such a lump sum often feel a combination of shock and excitement. Having a large cheque in your hand just feels so much better than getting small payments over time. Dreams suddenly feel in reach and the possibilities seem endless.

But it’s important to pump the breaks on your fantasies. (And keep in mind that 70% of lottery winners spend all their money in five years or less).

Lump sum retiring allowances

A common lump sum Canadian employees may receive is called a retiring allowance, or severance pay. It’s usually given to employees when they retire or get laid off after many years in service. It’s not a pension or salary.

It may be possible to get installments of a retiring allowance over two years. Splitting this income may be advantageous from a tax perspective.

The amount is reported on a T4, and you will be taxed at your marginal rate unless the amount is deposited or transfered into your RRSP or RPP. It’s beneficial to do so. Otherwise the CRA is likely to take half of it. Unfortunately, it’s likely you will only be able to shelter a portion, if any. You can estimate the amount you must remit by using this free online tax calculator.

Many are out of luck as employers can only directly transfer a few thousand for each year of service prior to 1996 without effecting RRSP contribution limits.

Of course, if you or your spouse still have unused RRSP contribution room then you can transfer in up to that limit yourself.

What to do with a lump sum

The first thing to do with a lump sum is… nothing. Just absorb the news. Don’t spend a cent until the initial rush of excitement is over. Let your imagination run wild during this time but don’t act.

Then make a plan.

Think about your money goals

Is your goal to start a business and be your own boss? Perhaps this lump sum can lessen the risk of quitting your job and starting a new venture. Is your goal to provide an education for your children so that they can start their working lives free of debt? Then perhaps investing the money in an RESP for them is the right move. Or maybe you’re in your 50s and just want to enjoy your life. Perhaps investing in income-generating securities so you can retire and start travelling immediately is your priority. Or perhaps you’re only in your 20s and you like your job. But you have an eye on the future and want to be comfortable. Perhaps you purchase an investment property with the money or open an investment portfolio that will grow slow and steady over the long term.Or perhaps you dream of being debt-free and so you first pay off your mortgage and student loans.

Whatever matters to you is where you should spend the money—for most people their priorities range from wanting freedom (spending the money on things that bring them joy), securing their present (paying off debt or saving the money) or building wealth (starting an investment portfolio). Where do your values lie?

Pay down debt

Paying down debt may be the first priority for many when they receive a lump sum. It can be a huge weight off your shoulders to be free of student loan and mortgage payments. At the same time, you have to consider that since interest rates are at historic lows that paying down debt may not be the best idea, from a math perspective. (Note that consumer debt should generally be paid off as quickly as possible or consolidated at a lower rate since the interest rates are often high.) It may be more advantageous to continue making moderate debt payment and then put the money into investments that have a higher rate of return. If your mortgage, for example, is at 1.75%, but you can find an exchange-traded-fund with a dividend yield of 5% then you could actually be making more money through investing then paying off debt.


After you’ve paid down your debts (if you’ve decided that’s right for you) then it’s time to save cash on hand. There’s nothing wrong with having a large balance in a savings account, even though it may be earning next to nothing right now. Just think of the peace of mind knowing that you can survive a financial crisis! Other things to save for may include your children’s university education or a down payment, as well as short-term savings goals such as a vacation, a car or a special splurge.

Invest your windfall

After you’ve paid down your debts and put some money in an emergency fund you’ll probably want to invest what’s leftover. Investing is one of the best way to grow your money over the long term and successfully build real wealth. If you’re a beginner investor then you may want to consider a robo-advisor because an algorithm will do everything—including selecting exchange-traded funds, rebalancing your investments, and performing tax-loss harvesting. All you have to do is select your risk level and then transfer funds.

If you feel confident and want a do-it-yourself approach then we suggest a long-term buy-and-hold strategy. The research shows that passive traders end up with a higher rate of return than active traders, partly because they pay less in commission and fees.

Another decision to make is whether to invest a lump sum at once, or slowly over time to take advantage of dollar-cost averaging. Technically, those who invest a lump sum at once tend to come out ahead while those who choose to invest more slowly over time enjoy more stability.

There’s nothing wrong with parking the money in a high-interest savings account (such as a tax shelter like a TFSA) until you develop the right investing strategy for you…

Consider the tax consequences

Lump sums may be seriously eroded by Canada’s high taxes. If you’re the beneficiary of a pension from a loved one who passed you may be on the hook to remit a full 53.5% of that to the CRA, leaving you less than half. Or if you complete a big work project, you’ll also only likely see half the amount in your account.

Luckily, some lump sums are tax-free, including lottery winnings and life insurance payouts, but any income or interest generated from those winnings held outside a tax-shelter will, of course, be taxed.

We suggest consulting with a qualified accountant as they may have strategies to help you reduce or defer tax owed.

Last Updated October 10, 2018

Trade stocks commission-free

Start trading
Spinning Wealthsimple coin

Everything you need to grow your money