indicatorAdvice for Albertans during the COVID-19 pandemic

What to do and consider if you’ve been laid off

If you’ve been laid off, here’s an overview of what you should do and what you’ll need to look into, including your termination package, severance, and pension options and taxes.

By ATB Wealth 14 July 2020 9 min read

There’s no other way to put it: getting laid off is incredibly hard. The upside is that you don’t have to figure out how to navigate it alone. We’ve created a list of what you need to look into if you’ve been laid off, so you don’t need to add stress to an already stressful situation. 


1. Review the terms of your termination

Before you accept the conditions of your termination, talk with a qualified legal professional to go over your situation and see if the general conditions of your termination are fair, as well as any specific conditions. For instance: 

  • If you choose a salary continuance versus a lump sum payment for your severance, can the employer stop future payments if you find employment?
  • Is there a non-compete agreement that would prohibit you from finding similar employment?
  • Are there other restrictions?

For more resources on methods of severance pay, explore the federal and Alberta labour regulations. For more information to support you in a job loss, explore the Understanding severance pay website by the Government of Canada.

2. Understanding your severance package

There are some important decisions you’ll need to make about your severance payout, no matter how much it is. You may have been offered a choice between a lump-sum payment, salary continuance, or deferred payments.

Here’s a list of what to think about when reviewing your severance package:

  • Ability to obtain other employment. If you find other employment and you chose salary continuance, the remaining payments may be stopped.
  • Health benefits and insurance coverage. Your severance package should outline what benefits your employer will continue to offer you, how long benefits will last and if you need to pay any premiums to maintain your benefits. Whether you chose salary continuance versus lump sums could cause your benefits to end at different points after termination. Your group benefit provider may offer you the ability to convert some or all of your previous group benefits to individually owned policies. In some cases, the conversion requires no medical underwriting. While this may seem like a convenient route, the cost of converting existing group benefits to individual benefits may be higher than applying for new policies. Depending on your current health, getting new policies may make more sense for you.
  • Employment Insurance (EI) eligibility. If you’re normally eligible for EI benefits, whether you choose salary continuation or lump sum severance, your EI benefits will be delayed following your unemployment as a result of the severance payment(s). In the case of a lump sum payment, it represents a certain number of weeks of earnings. Your payment is treated as if it was salary continuance paid to you over those weeks and your ability to collect EI is delayed until that period of time is over. Whatever option you go with, we recommend that you file a benefit claim as soon as you’re unemployed so that your claim can be processed as quickly as possible.
  • Generating Registered Retirement Savings Plan (RRSP) contribution room. Salary continuance is usually treated as employment income, which means it will create more RRSP room. The payment of a lump sum severance is generally treated as a retiring allowance and doesn’t create future RRSP room.

3. Retiring allowance 

If you were employed long-term with your previous workplace before 1996, some of your severance may be considered “eligible retiring allowance.” The eligible portion of a retiring allowance can be contributed to an RRSP without the use of RRSP room. The contribution will decrease your taxable income like any RRSP contribution. The amount that qualifies as eligible can be reported as a transfer so it doesn’t require room. 

Want to know your eligible amount? Find out using the following formula:

The sum of:

  • $2,000 times the number of years before 1996 during which you were employed by the employer, and
  • $1,500 times the number of years before 1989 during which you were employed by the employer and didn’t have vested contributions to a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP).

Employer savings and pension plans

If you have an employer-sponsored savings plan—like an employee profit share plan (EPSP), group RRSPs, a deferred profit sharing plan (DPSP) or a defined contribution pension plan (DCPP)—you may be able to transfer the value of both employer and employee portions of these accounts to appropriate personal accounts, depending on the rules of your employer plan. If you have a defined benefit pension plan (DBPP), read on.

Defined benefit pension plan (DBPP)

If you’re a member of a DBPP, you have a traditional pension designed to pay you a guaranteed, specific income when you retire, giving you (and your spouse/common law partner) income for life.

The amount of that income is calculated based on your earnings and years of service.

After being laid off, you’ll likely have the choice to take either guaranteed income payments from the pension plan or take the lump sum (also called “commuted value”) of those income payments. When your employment ends you’ll be given a package that summarizes your pension options.

If you go with the pension income option, you’ll have a few choice to make:

  • When to start your pension payments. Depending on your current age, length of employment and the specifics of the plan, you may be able to choose an early retirement benefit. Or you may have to choose a deferred pension, which starts the income payments closer to the “normal retirement date” the plan indicates—this is usually when you turn 65. If you have a deferred pension but you take it out early, it may be reduced by a percentage for each year of early retirement, or adjusted to take into account that you’ll be receiving more payments over your lifetime.
  • Single versus joint pension options. If you’re married or have a common-law partner, you’ll have to choose a pension payout that guarantees lifetime income for both of you (unless your spouse or common-law partner signs a waiver form). You can choose to have the income level remain the same throughout both of your lifetimes, or choose to have income that starts higher while you are both living and decreases to a lower amount after one of you passes away. Depending on the pension plan, this decrease may happen only when you pass away or on the first death. It’s important to understand the specifics of your particular pension options, but we know that this topic can get confusing and overwhelming. An ATB Wealth advisor would love to review your benefit options in detail and equip you to make the best decisions for today and the future.


Employee profit sharing plan (EPSP)

These are non-registered accounts and can be transferred to your own non-registered account. Keep in mind, if you choose to transfer out of the group plan “in-cash” (liquidating the investments) capital gains may be triggered and taxes payable. Another option could be to transfer out “in-kind” (your investments stay intact) as they transfer to your own non-registered account.

Registered retirement savings plan (RRSP) & deferred profit sharing plan (DPSP)

Tax-deferred savings in employer sponsored RRSPs and DPSPs can be transferred on a tax-deferred basis to your personal RRSP.

Defined Contribution Pension Plan (DCPP)

The value of your DCPP is also tax-deferred, but is “locked-in” since it’s subject to either provincial or federal pension legislation. There are restrictions on withdrawals and to protect spousal rights for retirement and death benefits.

The value of the DCPP will generally be transferred to what is essentially a locked-in RRSP, most commonly a Locked-in Retirement Account (LIRA) or a Locked-in Retirement Savings Plan (LRSP). Generally, these accounts wouldn’t be accessible until a lifetime income is initiated with a transfer to a Life Income Fund (LIF) or a life annuity.

Deferred compensation arrangements

If you have restricted stock units (RSUs), deferred stock units (DSUs), stock options or a similar incentive plan, the specifics will vary from employer to employer and the details will be outlined in your severance package.

The taxation and timing of these transactions need to be considered and included as part of your overall strategy for maximizing all of your termination options. We recommend seeking the advice of a tax professional.


4. Tax considerations with a layoff and opportunities for tax deferral

Your taxable income in the year of the layoff could be substantial. Remember, your annual income taxes are based on your total income for the calendar year—this will include earned income and taxable benefits up to the date of termination, plus severance payments.

Your total taxable income in the year of the layoff may increase if you take the commuted value of your DBPP. The payment of the commuted value of a DBPP into a LIRA account is subject to the calculation of the maximum transfer value (MTV). Any amount in excess of the MTV is paid out as a taxable lump sum amount.

Lump-sum payments are subject to withholding tax. You can look at the Government of Canada’s resource for withholding rates for lump-sum payments to confirm the amount of tax withheld on any payments you’ve received. 

However, your total tax payable will be based on your total taxable income for the year. You’ll have to come up with additional cash at tax time to pay your tax bill, so it’s important to take advantage of any tax savings opportunities you can.


Ways to save on taxes

Maximizing RRSP contributions up to your available RRSP contribution room is a simple and effective way to reduce your current tax bill. Amounts contributed to an RRSP are deducted from your taxable income and will reduce your tax payable. And as we went over above, if some of your severance qualifies as eligible retiring allowance, that amount can be contributed directly to your RRSP without the use of RRSP room.

You should also maximize contributions to your tax-free savings account (TFSA) and your spouse or common-law partner’s TFSA. Although this won’t reduce your current tax, it will provide tax-free growth and withdrawals going forward.

It may be worthwhile confirming if there’s an option to have any of your severance paid as deferred payments, allowing the amount to be paid to you over two years or more, and reducing your tax burden. Any potential tax savings should be considered alongside the time value of money. For example, if the payment is deferred until a future year, the opportunity to invest or utilize these funds for the remaining months in the year would be lost.

To make sure you’re making the most of your termination payouts, we recommend that you talk with a qualified tax professional to go over other tax savings strategies that suit your needs.

Looking at the bigger picture

It’s important that you have enough cash and liquid assets to maintain essential household expenses and prevent illiquidity. The ATB Wealth Financial Management Fundamentals Guide outlines financial management strategies that can help you make the most of your current financial situation, including:

  • Controlling your expenses
  • Using credit wisely
  • Debt restructuring
  • Distinguishing between needs versus wants
  • Budgeting and a budgeting worksheet

Your financial options after your recent job loss are part of a bigger picture of your financial wellbeing and security. An ATB Wealth advisor can help you understand your options, how they fit with your goals and work with you to provide a path forward.

Need help?

Our Client Care team will be happy to assist.