Severance Pay Canada: How Much You Are Owed and How It Is Taxed

“Severance” in Canada usually means everything an employer pays when it ends your job without cause. It can come from three layers, and the amount you are owed is whichever layer gives you the most:

The first layer, the minimum notice each province sets, is in the notice period guide. This page covers the other two, what goes into a package and the tax.

Statutory severance pay

Ontario

Ontario requires severance pay on top of notice when your employment is severed and you have worked for the employer for 5 or more years (counting all your time with the employer, continuous or not), and the employer either has a global payroll of at least $2.5 million or severed 50 or more employees in a six-month period because all or part of the business permanently closed.

The amount is your regular wages for a regular work week multiplied by your completed years of employment, plus completed months divided by 12 for a partial year, to a maximum of 26 weeks. Weeks of notice, worked or paid in lieu, count toward the service used in the calculation.

Federally regulated employers

Under the Canada Labour Code, an employee with 12 consecutive months of employment whose job ends through a layoff or dismissal for lack of work or the end of a function is owed severance pay of the greater of 2 days’ wages for each full year of service or 5 days’ wages. It is paid in addition to notice or pay in lieu.

The severance pay estimate by years of service adds termination pay and statutory severance together for common service lengths.

Common-law reasonable notice

If your contract doesn’t limit you to the statutory minimums, or its termination clause is unclear or unenforceable, a court decides what reasonable notice is. Courts weigh the factors set out in Bardal v. Globe and Mail (Ontario, 1960):

• the character of the employment (seniority and specialised roles tend to get more notice);
• length of service;
• age;
• the availability of similar employment.

There is no fixed formula, and two people with the same service can get different awards. As a rough guide to how far above the statutory minimums awards can run, reported decisions have tended to fall in these bands:

Awards above 24 months are uncommon and reserved for exceptional circumstances. A common-law award is reduced by what you earn from a new job during the notice period, because of the duty to look for work, covered with the rest of the litigation side in the wrongful dismissal guide.

What a severance package can include

What happens to group health and life cover when the package ends is covered in keeping benefits after leaving a job.

Tax on severance

The CRA treats most money paid because your job ended as a retiring allowance: amounts received when an office or employment is terminated (even when paid as damages for wrongful dismissal), payments in recognition of service, and payments for unused sick-leave credits on termination. Salary continuance, regular wages, bonuses and vacation pay are not retiring allowances; they are employment income taxed through payroll as usual.

Only service before 1996 creates room to transfer a retiring allowance into an RRSP without using contribution room: $2,000 for each year or part year of service before 1996, plus $1,500 for each year or part year before 1989 in which none of the employer’s pension or DPSP contributions had vested. For most people the tax levers are timing (a payment split across two calendar years, or salary continuance instead of a lump sum) and ordinary RRSP contribution room. Withholding is only an estimate; the final tax is settled on your return, and the income tax calculator shows the effect of a large payment on your bracket.

EI while you receive severance

Severance and termination pay are normally “allocated from the week of the separation”, which can delay your first payment; under a temporary measure, for claims or allocations that start between March 30, 2025 and October 9, 2027, earnings from separation “are not deducted from your benefits”. Filing promptly after your last day still matters; the steps after a layoff cover the timing, and the EI application guide covers the Record of Employment your employer must issue.

Negotiating a package

Severance offers often start at or near the statutory minimum, and the terms people commonly negotiate are:

• the length of notice, measured against a likely common-law range;
• lump sum or salary continuance, and the timing across tax years;
• how long benefits continue;
• bonus, commission and stock options for the notice period;
• an agreed reference letter;
• narrowing non-compete or non-solicitation terms;
• outplacement support.

A package usually comes with a release that gives up further claims once signed, which is why many people get the offer in writing and have an employment lawyer review it before signing. Long service, a senior role, an older age and a weak job market for your skills all tend to increase common-law notice and so the room to negotiate.

Quitting, constructive dismissal and cause

Resigning normally ends any claim to severance. The exception is constructive dismissal, where a major unilateral change to your pay, duties or location amounts to a termination; if your hours were cut, see your rights when your employer reduces your hours. An employer that dismisses for just cause owes no notice, but the bar for cause is high; both are explained in the wrongful dismissal guide.

If an employer doesn’t pay the statutory minimums at all, an employment standards complaint recovers them without going to court. For other rights when a job ends, see the workplace rights hub.