No one expects to lose their job. It’s normal. But if it were to happen to you, you might be entitled to a severance package. It could tide you over until you find a new opportunity. Here are some guidelines to help you understand how to calculate, negotiate, and invest your severance pay while reducing your income taxes.
It's important to note that you won't get severance pay if you were dismissed with cause—for example, if you committed fraud. You won't receive severance pay either if you voluntarily leave your job to pursue a new challenge or take early retirement.
On the other hand, if you lose your job because the company you work for is making cuts or closing, you my have a good case.
Ask yourself these two key questions to determine whether you are eligible:
1- Does my work contract include a severance pay clause? Does it set out any conditions (employment duration, nature of the job, salary, age, etc.)?
2- What does the law say about severance pay in my situation?
Good to know: Employment standards and legislation often fall under provincial and territorial control, but sometimes it's the Canada Labour Code that applies. This is the case in the airline and rail sectors. Basically, it depends on the industry. Here is the list of federally regulated industries and workplaces and the employment standards for the provinces and territories.
Also, good to know: Companies may offer better severance pay than the minimum required by law for a host of reasons (amicable settlement, reputation, recruitment tool, etc.).
When presented with a severance offer, remember the wise words instilled in you by your parents or favourite teacher: "Patience is a virtue." Always think carefully about what is best for you before you sign anything. You're not obligated to sign on the spot.
Even if the offer looks tempting, take the time to look at it in detail. A severance offer is much more than just a sum of money.
Among the things to consider are:
- The amount of money offered
- Material advantages (executive vehicle, cell phone, etc.)
- Employer-specific benefits (employee share ownership or other plans)
Pro tip: Most of us don't see severance offers very often, but there are specialists who see them every day. If something isn't clear or you have any doubts, contact a specialist like a lawyer or financial planner.
If you decide to negotiate, make sure you have the support you need. In many cases, a financial planner can help you prepare for this. In more specific situations that may involve legal issues, a lawyer can be an important ally.
Do you consider some requests more important than others? Try to prioritize them. You could also ask to maintain certain benefits, such as your health insurance, for a period of time. Remember that the offer can vary based on several factors, like your age, salary, the nature of the job and your years of service.
Be aware that when it comes time to discuss your severance agreement, lots of things are negotiable. Remember, you won't get what you don't ask for. The goal is to make the period following your job loss as comfortable as possible.
It's important to comply with the offer you sign. Do it for you—to protect yourself. If you breach the agreement (a confidentiality, non-competition, or non-solicitation clause), you could sabotage what you negotiated so hard to get.
There are as many ways to calculate a severance package as there are severance cases. For the purpose of this exercise, though, we'll focus on three important scenarios that may apply to you:
A- Does your work contract include a severance clause? If so, how the amount will be calculated has already been determined. Questions? Talk to the HR person responsible for your file.
B- Is there a law in your province or territory that applies to your situation? Contact the organization responsible for regulating employment standards in your province or territory of work. Click here to see the list. Feel free to contact them.
C- Does the Canada Labour Code apply in your situation because you work in one of these specific industries? As a general rule, the law provides for minimum compensation based on different situations.
To determine whether you have urgent or longer-term needs, draw up a balance sheet. Having this overall picture will better equip you to decide how to use your severance pay.
Remember to include any taxes you owe in your calculations. Since severance pay is taxable, it's highly possible that part of it will be needed to pay taxes. Consider setting some of the money aside for this reason.
If you have any unused contribution room and your situation allows for it, you can put your severance pay into your or your spouse's RRSP.
Tip: If you're considering going back to school and you meet the criteria, you can withdraw money from your RRSP to help finance your studies under a program called the Lifelong Learning Plan (LLP).
Good to know: If you had your job before 1996, you can transfer $2,000 more to your RRSP for each complete or partial year worked prior to 1996, and $1,500 more for each year worked prior to 1989. These amounts are added to your unused contribution room.
Be aware, however, that the additional $1,500 can only be applied for the years when you did not receive any employer contributions to a pension plan or deferred profit sharing plan (DPSP).
If you were working for your company prior to 1996, talk to a specialist to find out how you can benefit.
1. Think first about your emergency fund. If it contains sufficient funds to support you for some time should the need arise, that's great! If not, consider using your severance pay to replenish your rainy day fund.
2. Next, pay off any debts you have. Start with the ones with the highest interest rates, like your credit card balances.
3. Finally, think about investing. Talk to an advisor who can help you determine the right strategy for you. Together, you can determine your investor profile based on your age, risk tolerance, etc.
Severance pay can provide the financial stability you need while you look for your next professional challenge or project. You don't have to deal with this situation alone. Contact us for advice. We're here to help. We're here to answer your questions.
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