Tag: EI

Statutory vs. common-law severance

In every province and territory, there are statutory minimum payments that you are entitled to receive as an employee whose employment is terminated. This is called termination pay. This generally applies after three months of continuous employment and is meant to provide a safety net after you are let go without cause. Termination pay is generally a certain number of weeks of salary per year of service up to a maximum. 

Beyond this minimum payment, employers may also offer severance pay. This compensation is beyond the statutory minimum and based on common-law entitlements—basically, what you might get if you went to court. Both employees and employers prefer non-litigious solutions to a termination, and so may agree on a payment that is somewhere in between the statutory minimum termination pay and the common-law severance amount. 

Severance pay is not a specific formula, because the potential entitlement can be based on things like someone’s length of service, the type of position they hold, their age, and other factors.

When an employer offers a severance package, the employee is not obligated to take it. They can seek advice from an employment lawyer to understand the offer and whether they should be asking for any variations.

Should you take a lump sum or salary continuance?

Some employers offer a lump-sum severance payment that is payable all at once, while others offer salary continuance where payroll deposits continue for the duration of the severance. 

If you have the option to receive a lump sum, you may be eligible to defer some or all of it to a subsequent calendar year. This may be advantageous, especially if it is late in the year, to avoid having a large payment taxed at a high tax rate. Due to Canada’s progressive tax system, you may pay less tax to have the payment deferred and taxed in a subsequent year than added to your current year’s income.

If you have registered retirement savings plan (RRSP) room, you might choose to direct some or all of the payment to your RRSP. In this case, it will be deposited pre-tax, so that the gross amount goes directly into your RRSP. That means you will not get a large tax refund when you file your tax return, as you would were you employed the whole time. It is as if you received the tax refund up-front since no tax was withheld from the income deposited to the RRSP in the first place.

New EI rules can help

When an employee is terminated, they are generally eligible to collect Employment Insurance (EI) benefits. The federal government introduced a temporary change to EI for new claims in March 2025 in response to the U.S. government’s tariffs on several foreign countries, including Canada. The temporary measure was meant to end on October 11, 2025, but has been extended to April 11, 2026. 

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There is typically a one-week waiting period after salary continuance ends. For lump-sum separation earnings like severance pay, vacation pay, or sick-leave credits, there is normally a further delay to apply. But under the temporary EI measures, a terminated employee can apply for EI benefits immediately.

Regular EI benefits are generally capped at 45 weeks, but under the temporary measures, a recipient may be entitled to an additional 20 weeks if they are a long-tenured worker. To be considered a long-tenured worker, the applicants must have met two conditions:

• Received fewer than 36 weeks of regular or fishing benefits in the three years before the start of a claim

• Paid at least 30% of the annual maximum EI premiums for at least seven of the 10 years before the year that a claim starts (the EI maximum for 2025 is $695 per week)

Are you still entitled to benefits?

If you had benefits like life, disability, or medical insurance, a termination will generally end this coverage. Life insurance is often extended based on the number of weeks of salary you are paid out. Disability insurance generally ends on your last day of work. 

Some group life insurance policies allow you to convert your coverage to a personal policy. This may be advisable if your health is poor, as you may be able to maintain it without having to provide health information to the insurer. 

You can purchase your own life insurance policy from an insurer, and this may be preferable if your health is good. Disability insurance is more complicated to replace, because if you are not working, you do not have an income to replace. 

Although the loss of medical coverage may be worrisome, it may not be necessary to replace it. Health insurance is not meant to create a windfall where you receive more back from the insurance company than you pay in premiums. To the contrary, the insurer makes a profit when the average policyholder pays more in premiums than they receive back in reimbursements. As a result, rushing to replace coverage may not be advantageous compared to just paying for health-care costs out of pocket when your coverage ends. 

Dealing with pensions and group RRSPs

If you have a defined benefit (DB) pension, you may have the option to take a lump-sum payout, some or all of which may be eligible to transfer on a tax-deferred basis to a locked-in retirement account (LIRA). When you forgo your future monthly pension, you need to invest the proceeds to produce a retirement income. Not all pensions allow you to take a commuted value transfer, however, and some limit the option based on your age (e.g., only under age 55). 

When interest rates are lower, the lump sums paid out are higher; when interest rates are higher, the payouts are lower. Those best suited to consider a lump sum are investors with a high risk tolerance or a short life expectancy.