Get a free, no obligation personal loan quote with rates as low as 6.99%
Get Started You can apply with no effect to your credit score

Did you know you may be entitled to severance pay in Canada if you’ve been terminated from your job? 

Whether it’s due to budget cuts or bankruptcy, there are many reasons why you might lose your job. If you don’t have an alternative form of income or an emergency fund, it can cause you a lot of financial stress. That is, unless you’re entitled to severance pay.

However, do all employees deserve severance pay? Many government officials and Canadian citizens think that should be the case, no matter how long an employee has worked for a company. 

Find out when you’re eligible for severance pay in Canada.

What Is Severance Pay In Canada?

Severance pay is a form of compensation that some employers will pay you when your job is terminated through no fault of your own. They may also offer job-loss benefits, which they’ll call a severance package, severance agreement or retiring allowance.

Generally, if you work for the same employer for at least 12 consecutive months, you should be eligible for severance pay. However, there are different employment regulations imposed by the federal, territorial and provincial governments in every region.

How Much Severance Pay Are You Entitled To In Canada?

In Canada, you’re entitled to 2 days of an employee’s regular wage rate, for each full year of employment. The minimum severance pay must be at least 5 days’ pay.

What Is Considered A Termination Of Employment?

Getting fired doesn’t necessarily mean you’ve been performing badly at work. In fact, there are several incidents that can be considered a termination of employment, such as:

Termination Of Employment

According to the Canada Labour Code, there are procedures an employer must follow when terminating an employee from their job. Different labour laws also apply if a group termination involves 50 or more employees (under specific circumstances).  


Being laid off is considered a termination of employment when the employer has no intention of rehiring the employee. When that happens, the employer has responsibilities and obligations toward the employee, normally associated with the termination of their job. The employee then benefits from certain rights as protection from “unjust dismissal”.

Certain lay-offs don’t qualify as a termination of employment, including those that:

  • Are a result of a lockout or strike
  • Last 3 months or less (extensions may occur in specific situations) 
  • Last over 3 months but no more than 12 months. During this time, employees maintains recall rights pursuant to a collective agreement. 

Group Termination

A group termination of employment is when 50 or more employees from a single industrial company lose their jobs simultaneously on the same date or within any 4-week period. In that event, the employer has to notify the Head of Compliance and Enforcement of the upcoming termination.

The Importance Of Severance Pay In Canada: How Job Loss Can Affect Your Finances

Severance pay is important because it helps employees when they get laid off or let go due to a situation beyond their control, like their employer downsizing the company or declaring bankruptcy. This way, they’ll hopefully experience less financial stress and can keep covering their essential costs and debts while making the transition between jobs smoother.     

Tips On Managing Your Finances After A Job Loss

Whether you’re eligible for severance pay or not, one thing is certain; going too long without proper employment could be detrimental to your finances and credit score. Luckily, there are things you can do to manage your finances after losing your job, like:

Use A Loan To Cover Costs

If you’re financially struggling after a job loss, you could try applying for a personal loan. This way, you can get a lump sum of cash to cover your expenses while you find a new job. You can then repay the lender in installments over several months or years, rather than paying in one lump sum.  

Though you may be unemployed, getting a loan is still possible. There are many online lenders who offer unemployment loans, with or without employment verification. However, these loans feature higher interest rates, more fees, and shorter terms. 

Before applying for any loan in Canada, be sure to check your credit score. It’s often a significant factor used by lenders when approving borrowers. You can get it free at Compare Hub.

Use A Job Board To Find Employment

In Canada, there are plenty of different online job boards that you can join for free (or for a paid premium membership) and use to discover new job opportunities across the country. Just remember to research a potential employer properly and read reviews from current or former employees before you give them any personal information.

Best Joboards To Find A Job
IndeedLearn more
MonsterLearn more
Canadian Job BankLearn more
JoobleLearn more
LinkedInLearn more

When Are You Eligible For Severance Pay In Canada?

Severance can occur under a number of circumstances, like when your employer:

  • Lets you go because they’re declaring bankruptcy
  • Lays you off for 35 weeks or more during a single year
  • Shuts the company down entirely
  • Eliminates your job position

As an employee, you have the right to claim severance pay once you’ve completed at least 12 consecutive months of continuous employment before a lay-off or dismissal leads to a termination of employment. 

When Are You Not Eligible For Severance Pay In Canada?

Technically, your employer is NOT required to give you severance pay when: 

  • You quit or terminate your employment voluntarily 
  • Your job contract features an end date which comes to pass  
  • A lay-off doesn’t lead to a termination of employment
  • Your job is terminated for just cause, like poor performance

How Much Money Can You Get Through Severance Pay In Canada?

Typically, severance pay is equal to 2 days of an employee’s regular wage rate, for each full year of employment, with a minimum of 5 days’ pay. 

However, as mentioned, Canada’s federal, provincial and territorial governments impose their own regulations when it comes to severance pay. In certain cases, you won’t qualify for severance pay, especially if you’ve only worked at a job for a short time (less than 12 months). The amount of money you’re eligible to receive will depend on these factors:

  • The regulations of your province/territory
  • Your union’s collective agreement
  • The terms of your employment contract 
  • The reason(s) you lost your job
  • How long you’ve worked for the employer

You may see your severance pay in the documents that describe your salary and terms of dismissal, like your employee handbook or letter of offer when you started your job. 

Other Benefits That May Be Included In Your Severance Pay In Canada

Severance pay can also be called termination pay and classified as employment income, retiring allowance, non-taxable damages, or a combination of all three:

  • Employment Income – Severance pay as Employment Income (EI) is the most common and highest-taxed form of severance. Your employer may give it to you as a lump sum or salary continuance.  
  • Retiring Allowance – This allowance is meant to acknowledge your long service at a job and is only given after retirement. It can be transferred directly to your Registered Retirement Savings Plan (RRSP) or Registered Pension Plan (RPP) but there are rules for contribution. For example, any retiring allowance that’s provided for years worked prior to 1996 will not affect your contribution room.        
  • Non-Taxable Damages – Non-taxable damages refer to damages that aren’t directly associated with your job. For instance, if you get injured at work but that isn’t the reason you lost your job, you may qualify for non-taxable damages.    

Is Severance Pay Taxable In Canada?

Yes, severance pay is taxable. The tax you’re charged depends on how your severance pay is structured, how it’s distributed, and how you’ll use it. Taxing methods include:  

Lump Sum Payment

A lump sum payment is when you receive all your severance pay at once, right after your job is terminated. Here, your employer will withhold the required income tax, unless it’s related to CPP or QPP (Quebec Pension Plan) contributions, or EI premiums.

The amount of tax your employer withholds on your lump sum payment is based on your marginal tax bracket. So, if you’re receiving a large severance pay, you can expect to pay more in taxes because it could move you into a higher marginal tax bracket.    

Salary Continuance

If you keep receiving regular payments after leaving an employer, it’s known as salary continuance. The income tax you pay on salary continuance is the same as you would with ordinary EI. You’ll have to pay CPP/QPP contributions and EI premiums on salary continuance payments too.    

Deferred Payments

While not every employer offers them as an option, deferred payments provide the best income tax benefits when it comes to severance pay. They can spread your severance payout over 1 to 2 years, which is a tax advantage because it may put you in a lower marginal tax bracket each year. Just keep in mind that deferred severance payments can accrue interest. You’ll then be taxed on that interest as though it were income.   

How To Avoid Tax On Severance Pay In Canada

You may be able to lower the amount of tax payable on your severance pay by transferring it into an RRSP or RPP. This shelters your money from tax by reducing your taxable income. The amount you can benefit from this depends on your RRSP contribution limit and how much of your severance pay is considered eligible. 

What Is Eligible Severance Pay? 

The eligible portion of your severance pay can be transferred straight to your RRSP with no effect on your deduction limit, similar to being given extra contribution room. This means that you can transfer as much of your severance pay to your RRSP even if you have no RRSP contribution room left. 

You can see the eligible and non-eligible portions of your severance pay on your T3 or T4 slip. For part of your severance pay to qualify as a retiring allowance, a payment must be earned for work you completed before 1996.

However, you aren’t permitted to transfer the eligible portion of your severance pay to your spouse or common-law partner’s RRSP. Additionally, you can’t transfer any part of a retiring allowance to your own RRSP if you’re older than 71 at the end of the tax year.  

Things You Should Do Before Accepting Severance Pay In Canada

If you’re entitled to receive severance pay in Canada, be sure to review your severance package before signing the dotted line. To receive severance pay, you must sign an agreement that outlines the severance pay or package and what you have in your pension. 

You should be given appropriate time to review the agreement, so read it carefully prior to signing it, since it may include extra benefits, such as an offer from your employer to help you find a new job.

For each benefit provided by your employer, make sure you understand:

  • How long your coverage will last
  • What fees or premiums you must pay to obtain coverage
  • What your employer will cover under your severance package     

Not Sure If You’re Eligible For Severance Pay In Canada?

Then don’t hesitate to speak with your employer, an attorney or another financial expert, because it’s very important to know your rights and obligations as an employee. After all, severance pay can give you some much-needed financial support when you lose your job for reasons beyond your control, so you should never take it for granted.    

Severance Pay In Canada FAQs

How will I receive my severance pay in Canada?

In Canada, employers will provide severance pay using one of these three methods:
  • Lump sum payment
  • Salary continuance
  • Deferred payments 
Your employer may let you choose how you wish to be paid but watch out, the method they use can affect the way you’re taxed and may affect your Employment Insurance/Income (EI) benefit payments.

Should I accept my severance pay if I’ve been fired unjustly?

This depends on how your employment was dismissed and how you wish to proceed. According to the Canada Labour Code, you can file an unjust dismissal complaint within 90 days of your job’s termination date, as long as it’s under specific circumstances. 

How is severance pay in Canada calculated?

Typically, severance pay is equal to 2 days of an employee’s regular wage rate, for each full year of employment, with a minimum of 5 days’ pay. 

Can I collect EI if I receive severance pay in Canada?

No, you can’t collect EI while receiving severance pay. When you get your severance package, your EI payments will begin after your severance period expires. Severance pay and EI are meant to sustain you financially between jobs.  

Do you get severance pay when laid off in Canada? 

If you’ve been terminated from your job due to a layoff or dismissal, you may be eligible for severance pay if you’ve completed at least 12 consecutive months of work before being laid off or dismissed from employment.  
Bryan Daly avatar on Loans Canada
Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

More From This Author

Special Offers

More From Our Experts
Loans Canada places No. 228 on The Globe and Mail’s fifth-annual ranking of Canada’s Top Growing Companies.

By Caitlin Wood, BA
Published on September 29, 2023

Loans Canada is excited to announce it has made it onto the Globe and Mail’s Top Growing Companies list for the second year in a row.
Finder Awards Finalists: Personal Loans Customer Satisfaction Awards 2023

By Priyanka Correia, BComm

Loans Canada is happy to announce it received the finalist award in the Best Personal Loan Search Platform category.
Beware of Fraudulent Lenders Impersonating Loans Canada

By Caitlin Wood, BA

A note to our clients about fraudulent lending practices and illegal upfront fees.
Best Online Chequing Accounts In Canada 2024

By Trevor O'Hagan

Are you looking for an online chequing account with no fees or a minimum balance? Check out our list of the best online chequing accounts in Canada.
Medical Expenses You Can Claim For Taxes In Canada

By Sandra MacGregor

Wondering how much can you claim for medical expenses on taxes in Canada? Find out what medical expenses are eligible and the proper way to claim them...
Conditional Offer: Meaning And How It Works

By Lisa Rennie

Find out how a conditional offer can protect buyers financially and protect them from purchasing properties with hidden problems.
Alberta Child And Family Benefit (ACFB) Payment Dates 2024

By Chrissy Kapralos

The Alberta Child and Family Benefit (ACFB) is a program that gives lower- and middle-income families with children under 18 financial assistance.
How Does Buying A House As A Common Law Couple Work In Canada?

By Lisa Rennie

Are you buying a house as a common law couple In Canada? Find out how it'll affect your mortgage and how it affects the property title.

Recognized As One Of Canada's Top Growing Companies

Loans Canada, the country's original loan comparison platform, is proud to be recognized as one of Canada's fastest growing companies by The Globe and Mail!

Read More

Why choose Loans Canada?

Apply Once &
Get Multiple Offers
Save Time
And Money
Get Your Free
Credit Score
Expert Tips
And Advice

Build Credit For Just $10/Month

With KOHO's prepaid card you can build a better credit score for just $10/month.

Koho Prepaid Credit Card