A new poll from Leger finds that up to 40 per cent of Canadians are afraid of losing their job because of the trade war with the U.S. Should clients find themselves with a pink slip, here’s what advisors and tax experts recommend for reducing the tax burden.
Negotiate how a severance is received
Clients who worked for an employer for years may get a large lump-sum severance, which is taxable in the year received.
Evelyn Jacks, president of Knowledge Bureau Inc. in Winnipeg, advises those clients – especially if they were laid off toward the end of the year – to see if the employer will divide the severance over two years to lessen the tax blow.
If the employer refuses, then salary continuance – in which the employee is paid the severance as a salary, like when they were working – is another tax-effective option.
Jamie Golombek, managing director, tax and estate planning, at CIBC Private Wealth in Toronto, says the timing of the layoff will affect how a client approaches the severance negotiation.
He notes that someone who is laid off in January and whose prospects are good for being rehired quickly may not need to worry about pushing some of the severance to another taxation year.
“It depends on each person’s tax scenario, their income levels, and their other sources of income,” he says.
Make an RRSP contribution
Putting the severance directly into a registered retirement savings plan (RRSP) will defer the amount of taxes a client pays. If they have years of unused contribution room, the client may be able to put the total amount away.
“It’s a way to limit the amount of income that’s going to be reported on your tax return next year,” says Aaron Hector, certified financial planner and private wealth advisor at CWB Wealth Management Ltd. in Calgary.
He uses the example of a client who normally has a 36 per cent tax rate, but the severance pushes her to a 45 per cent rate. An RRSP contribution keeps the tax bracket lower or the same as before.
Ms. Jacks says laid-off clients have plenty of time to contribute to an RRSP for the 2025 taxation year (until March 2, 2026). In the meantime, they can park the money in a tax-free savings account. If they’re planning to buy a house, they could also put some money in a first-home savings account.
Consider a big donation
For affluent clients who are confident they’ll be employed again quickly, Mr. Golombek says to consider charitable giving.
Some clients may have charitable commitments every year they want to keep. Mr. Golombek gives the example of a client who receives $50,000 in a lump-sum severance and gives $1,500 a year consistently to various charities.
Assuming the client’s cash flow is sufficient and they don’t need the severance for living expenses, they could consider putting the $50,000 into a donor-advised fund.
“You get an offsetting donation tax credit that can shelter the tax on that retiring allowance or on that severance package,” he says.
Mr. Golombek notes that in some cases, the donation credit can be more than the tax paid on the severance, depending on the client’s tax bracket.
“Effectively what you’ve done is you’ve pre-funded a lifetime worth of charitable giving, and you’ve paid no taxes on the severance,” he says.
One limitation is the client can only use up to 75 per cent of their net income in the year toward this strategy but any excess can be carried forward for up five years.
Write off legal fees
Legal fees are not tax deductible for clients who accept the severance package the employer offered, Mr. Golombek says. But clients who sue for wrongful dismissal and other reasons can deduct their professional fees on their tax return up to the amount of the severance received.
Low or no severance? Think strategically
Not all clients will receive a severance if they weren’t at a job long enough or for other reasons.
Clients who pay income taxes in quarterly instalments should work with an accountant to determine whether they can forgo an instalment, Mr. Hector says. As their income will be lower than normal, that means fewer taxes may be owed.
“Quarterly instalments are based on a historical look at your tax situation,” he notes. “So, in a year in which your whole tax situation changes, they need to consider whether they still want to remit in the magnitude they planned previously.”
A year in which a client earns less income could also be an opportunity to sell some investments.
“We can bring some of this other investment income into the tax year to take advantage to fill up the lower brackets,” Mr. Hector says.
Decide on benefits
Most employees would have been receiving life insurance and a group benefits package from their employer.Mr. Golombek says clients should research whether to remain in the group health and dental plan in some capacity. The termination letter usually lists options about group benefits.
“If you’re the type who barely makes any claims other than going to the dentist twice a year, you may decide to self-insure, but you can certainly get a quote,” he says.
Mr. Golombek also cautions clients not to forget about travel insurance coverage.
“If you’ve lost your job and you’ve lost your benefits, you’ve also lost your travel insurance,” he says.
“If you’re no longer part of your group plan, you want to make sure that every time you travel outside of Canada, you buy that travel insurance so you’re fully protected in case something happens to you while you’re away.”