Published: March 12, 2020
Last Updated: September 29, 2021
All amounts received as a consequence of termination of employment (job loss), even if received as damages, are fully taxable for Canadian income tax purposes in the year received. However, a portion of the payment may be eligible for transfer to an RRSP.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
Termination pay is subject to withholding tax rates from 5 percent to up to 30 percent. The tax rate depends on what province you live in. The tax deduction depends on how you receive the severance pay. If you receive the compensation directly as a lump sum, it is part of your taxable income and subject to tax deductions from you. It becomes taxable because the employer has to withhold an amount for tax. You need to report your termination pay on Line 13000 of our tax return.
Employers calculate termination pay basing on the worker’s weekly salary during the past eight weeks of regular or average working hours. The total amount is divided by eight and multiplied by the number of weeks the company is obligated to pay. The total number of weeks on the calculation is between one to eight weeks, depending on the employee’s length of employment. The resulting amount becomes payable upon the termination of employment. A worker who resigns or quits voluntarily is not eligible for termination pay.
Termination pay and severance pay are often mistaken to be the same. However, these are two very different concepts. Termination pay or statutory notice is compensation for employees who lost their job. The amount is the minimum pay under the Employment Standards Act (ESA). The length of service is the basis for the pay. Employers give severance pay to bridge the unemployment gap and aid in covering financial obligations during unemployment while the employee is still looking for a new job.