Severance Counselling

When you lose your job, one of your biggest concerns will be your financial health. A transition review can help you identify issues and develop a plan to address cash flow needs, replace employee benefits, consider pension options and handle cash payments in the most tax-effective manner. 

Most people have seldom, if ever, been through a similar experience in the past. By providing clarity and direction in these areas, we can ease some of the stress of job loss so that you can focus on your future.

Budgeting and Cash Flow Needs

The first order of business is to review your budget.  How much do you need to cover your monthly commitments?  Cut back on discretionary spending and consider partial payments, where possible, to preserve cash until you can assess the situation and plan for ongoing needs.  Your cash flow needs may dictate how you handle lump sum payments and pension plan/RRSP entitlements due to you on leaving your former employer.

Payments which may be eligible for transfer

When you leave a job, there may be several types of credits and lump-sum payments owing to you.  If you were to take them all in cash, they would be added to your other income for the year and taxed at your highest marginal tax rate.  But some of these payments may be eligible for a direct transfer to your RRSP instead. Therefore, you will not have to pay the tax on the transferred money until you withdraw it from your RRSP – probably several years down the road.  Once you have determined how much you will need to meet your immediate cash flow needs, you can devise an overall strategy to handle your entitlements. 

Salary and wages, overtime pay, and vacation pay are regular employment income.  They are paid out when you leave and taxed at your normal rate. These funds are not typically eligible to be directly transferred into a Registered Retirement Savings Plan (RRSP).

Retiring allowances, severance pay, or a refund of ‘excess amounts’ of the commuted value of pensions are also considered by the Canada Revenue Agency to be taxable income. However, these funds may be eligible for tax shelter in an RRSP, depending on the type of payment, your years of service with the employer (or related company) prior to 1996 and/or your personal RRSP Contribution Room.

Retiring Allowances

A Retiring Allowance is defined by the Canada Revenue Agency as ‘an amount received on or after the retirement of an employee in recognition of long service or in respect of a loss of an office or employment (severance).’ A payment for unused sick leave credits also qualifies as a Retiring Allowance.

All or part of a Retiring Allowance can be paid by your employer directly to your RRSP without having tax withheld first, to the extent that it can be accommodated by your existing RRSP Contribution Room.  But if you worked for your employer or a related company prior to 1996, you may also be able to take advantage of an additional amount of contribution room, called the ‘Eligible Amount.’ 

The Eligible Amount is computed as $2000 per year or part year of service with the employer (or related party) prior to 1996 plus $1500 per year prior to 1989 to the extent that the employer portion of pension benefits did not vest with the employee.  Your Human Resources administrator will probably advise you of your Eligible Amount but you may want your tax professional or financial advisor to confirm the calculation.

The Eligible Amount can only be transferred to your personal RRSP -- not a spousal RRSP -- and it does not affect your regular contribution room.  Any amount of your Retiring Allowance over and above the Eligible Amount may be transferred to a spousal RRSP using your regular contribution room, but be mindful of the rules about withdrawing funds from a spousal RRSP. 

Once the ‘Eligible Amount’ of your Retiring Allowance has been determined, it can be contributed to an RRSP as a ‘Rollover’ at any time up to the 60th day of the year following termination (usually, the RRSP deadline.) Likewise, any additional amounts that you intend to contribute using personal RRSP limits must be deposited to your RRSP by this deadline. 
 
From a cash flow perspective, it is usually best to have the employer send the applicable amounts directly to your RRSP.  If you were to receive cash with the intent to make these RRSP contributions before the deadline, the employer would have to withhold tax of up to 30% on the amount first – which means that you would not have the full amount to contribute.

Other Amounts Available for Transfer

Group RRSPs

Your holdings in a Group RSP account may be directly transferred to your own RSP at an institution of your choice.  This includes both your own contributions and your employer’s contributions, if any.  A Canada Revenue Agency (CRA) form is used to make the transfer. Your advisor at the receiving institution or dealer will help you fill out this form and then send it to your Group RSP provider on your behalf.

Deferred Profit Sharing Plans (DPSPs) 

Employer contributions that were made on your behalf to a Deferred Profit Sharing Plan (DPSP) and have ‘vested’ are also eligible to be transferred directly to your own RSP account.  As above, your advisor at the receiving institution will help you fill out the form and then submit it to the DPSP on your behalf.

Registered Pension Plans (RPPs)

Registered Pension Plans may take one of two forms.  Both types usually involve a schedule of contributions from both the employee and the employer.  A defined benefit plan will deliver a specified amount of income at some point in the future with the employer’s contribution being whatever is required to deliver the income.  In a defined contribution plan, the employee and employer both contribute a specified amount of money to an investment plan, with the ultimate outcome being variable. 

If you have been a member of a registered pension plan, you may have the choice to leave your pension money in the employer’s plan until you are ready to take income from it, or transfer your accrued benefits to a special type of account called a Locked-In RSP.

You should carefully consider the pros and cons of both options before making a decision to move or leave your pension benefits.  This is usually an irreversible decision. 

The 'Excess Amount' of a Pension Transfer Value

If you have been participating in a defined benefit pension plan, the amount to be transferred will be a calculation of the current value of future benefits.  But the Canada Revenue Agency has limits on the maximum values that may be transferred directly to a Locked-in RSP.  If there is any additional value as calculated by your pension plan (the ‘excess amount’), it must either be taken in cash (with tax withheld) as income, or transferred to your RSP using your regular RRSP Contribution Room. 

A Note About Pension Adjustment Reversals (PARs)

Taking the transfer value may also result in having some personal RRSP contribution room restored due to a Pension Adjustment Reversal (PAR).  Ask your pension administrator to report any PAR as soon as possible after you stop working so that you can plan to use any additional RRSP contribution room that may be available.

Replacing Group Life, Health and Disability Insurance Benefits

Your employer-sponsored medical, disability, dental and life insurance coverage will expire. Some of these benefits may continue until the end of your notice period or until the end of the month in which your employment is terminated.

You may be able to convert some of your group benefits to a personal plan within certain time limits.  Life insurance, extended health benefits, critical illness insurance and disability insurance may be offered on this basis.  You may be able to secure benefits that you would not otherwise qualify for or receive better pricing or have a waiting period waived by converting your employee benefits. 

Check with your former employer to find out exactly when your coverage ceases and what the time limit is to apply for conversion. Examine your requirements, then make the necessary arrangements to obtain private coverage for any insurance you wish to continue until you qualify under your new employer’s plan.  In some cases you may be able to apply for some of the coverages under a spouse’s employee benefit plan. 

 Apply for Employment Insurance benefits right away 

You should apply for Employment Insurance (EI) Benefits right away, even though your benefits would not be payable until after the period over which E.I. allocates your severance payment has expired.  There is a two-week waiting period before benefits begin. If you find that you have to make a claim, you may have satisfied this waiting period. 

Any payments received on termination will be converted into weeks of earnings at your regular salary rate. These payments include wages in lieu of notice, vacation pay, severance pay or a "retiring allowance". This number of weeks will be added to the standard two-week waiting period. Payment of benefits will be postponed until this time has expired and then payments will usually commence if you are still unemployed.

If you plan to take a part-time position during your severance or waiting period, check with E.I. to see if these earnings will reduce your benefit once you are eligible to collect.

EI calculations and eligibility factors can vary widely.  Service Canada can help you understand your personal situation, your benefits and how they are calculated.  Their website is filled with lots of illustrative examples and information about E.I. claims.  Visit the website at www.servicecanada.gc.ca or call toll-free 1 800 206-7218 for more information.

If you would like to work with us to develop your retirement income plan, the first step is to compile the information about your personal financial situation and the 'softer' issues of your hopes and expectations for lifestyle and family in retirement. 

Contact us to assist you in your retirement income planning.