Are retiring employees eligible for severance pay?

Retiring employees often leave their jobs voluntarily, so do they get retirement severance pay? Here are the answers to the top questions about severance pay

Are retiring employees eligible for severance pay?
Employees may get retirement severance pay if it's included in their employment contract.

Updated June 13, 2024

As an employer, the law requires you to offer an employee severance pay if they’re terminated for reasons beyond their control. This type of compensation is meant to ease their transition in between jobs.

But what about retiring employees? Do they also receive retirement severance pay?

If you’re an employer or a human resources professional working out if an employee is eligible for a severance package, this article can help. The Canadian HR Reporter answers all your pressing questions about this form of compensation in this guide.

What is severance pay?

The Financial Consumer Agency of Canada (FCAC) defines severance pay as a type of compensation that an employee gives employees “who lose their jobs through no fault of their own.” These include instances where a company declares bankruptcy or needs to downsize.

Also called a severance package or severance allowance, severance pay is designed to assist an employee financially as they transition between jobs.

The federal, provincial, and territorial governments implement their own rules on severance allowances. That’s why eligibility requirements and compensation amounts vary depending on your jurisdiction.

For federally regulated businesses, including banks and airlines, federal regulations apply. This means that eligible employees receive whichever is greater of:

  • two days of wages at the employee’s regular rate for each full year that they worked with a company before termination
  • five days of wages at the employee’s regular rate

 Employers must also provide the employee with notice of termination or pay in lieu of notice.

If you’re wondering what the provincial or territorial rules say about severance packages in your jurisdiction, this table can help. Here, we have compiled the links to each province and territory’s employment standards webpage for easy access.  



British Columbia


New Brunswick

Newfoundland and Labrador

Northwest Territories

Nova Scotia



Prince Edward Island






Severance pay vs. retiring allowance

The terms severance pay and retiring allowance are often used interchangeably, but there’s a distinction. Just like a severance package, retiring allowance is given to an employee upon termination. It may also be given to employees after they retire, acting as a form of retirement severance pay. 

Retiring allowance may include other payments and benefits, which may qualify for special tax treatment under the Canadian Income Tax Act. Among these are:

  • payments for unused sick leave credits
  • any amount the employees receive after their employment is terminated

Retirement severance pay doesn’t include:

  • salary, wages, bonuses, overtime pay, and legal fees
  • superannuation or pension benefits
  • any amount an employee receives at the time of death
  • benefits from certain counselling services
  • unused vacation credits
  • wages in lieu of notice or termination pay
  • damages for actual or alleged violations of an employee’s human rights awarded under human rights legislation that aren’t taxable

In some situations, an employee may be able to contribute the retiring allowance to their registered retirement savings plan (RRSP) without using RRSP contribution room.

Severance pay vs. termination pay

Another term that severance pay is often confused with is termination pay. These, however, are two different things. Termination pay – also referred to as pay in lieu of notice – is given to employees who are let go without adequate notice. This may be due to several reasons, including poor performance and misconduct. 

In this situation, the employee receives pay through a notice period but isn’t allowed to report to work. This option is preferrable if you don’t want to continue employing a worker up to their termination date.

Most jurisdictions require an employee to be with a company for a certain number of months to be eligible for termination pay. In Ontario, for example, only those employed for at least three months qualify for pay in lieu of notice.

Find out the biggest misconceptions about severance pay from a law expert in this article.

Are you required to give employees retirement severance pay?

Currently, there are no laws in Canada requiring employers to provide a severance package to workers who willingly leave their jobs. According to Tim Mitchell, a partner at McLennan Ross in Calgary, these include retiring employees.

“There is no general legal requirement for an employer to pay severance pay to an employee who voluntarily resigns from his employment,” he explains. “An employee who chooses to retire, without any element of compulsion, is considered to have resigned. Any obligation to pay that retiring employee severance pay would have to be found in applicable legislation or an individual employment contract or collective agreement.”

But what about employees with at least five years of service and who don’t have an actuarially reduced pension plan, do they get retirement severance pay? Mitchell says it depends on the employer.

“The obligation to pay severance remains dependent upon the employer having taken the initiative to sever the employment relationship,” he notes.

“In Alberta, for example, retiring employees whose employment is governed by provincial employment standards legislation have no right to severance pay under the statute.”

For Ontario employers, Mitchell cites a provision in the Ontario employment standards regulation relieving “an employer of an obligation to pay severance pay to an employee whose employment is severed and then retires and receives an actuarially unreduced pension benefit.”

He notes, however, that different rules may apply where employment is severed through a process of mandatory retirement.

Who is eligible for severance pay?

Workers who have been employed in a company for at least 12 consecutive months are entitled to severance pay. This is according to the Employment and Social Development Canada (ESDC).  

The reasons for termination must also be beyond the employees' control, including:

  • the employer is filing for bankruptcy
  • the company is closing permanently
  • the employer is eliminating the employee’s role
  • the employee is being laid off for 35 weeks or more in a year

A severance package assists employees financially as they transition between jobs. Employees also often provide severance allowance as a sign of good faith and to establish a positive reputation within the industry.

Employers, however, aren’t required to offer severance pay if:

  • the employee is dismissed for just cause
  • the employee terminates their own employment, either by resigning or retirement
  • the employee refuses an alternate role after their role is eliminated
  • the employee’s contract indicates an end date and the contract ends

In most cases, independent contractors don’t qualify for a severance package. This is unless their contract clearly states that they do. Some employers, however, hire independent contractors and treat them as employees. In this scenario, the court may deem workers to be eligible for a severance allowance.

How is severance pay calculated?

Calculating an employee’s severance pay is easy. You can do the computation yourself. All you have to do is multiply the worker’s regular wages for one week with the number of years they have completed with the company. For an incomplete year, the number of completed months is divided by 12, then added to the number of completed years.

Here’s the formula:

Retirement severance pay – formula on calculating severance pay

Here’s a sample calculation for an employee who:

  • works for 40 hours a week
  • earns $18.50 per hours
  • has been with your company for seven years and nine months

Step 1: Calculate the employee’s regular weekly wage.

$18.50 x 40 = $740

Step 2: Compute the number of years the employee has completed with the company.

7 + (9 ÷ 12)

7 + 0.75 = 7.75

Step 3: Multiply the employee’s weekly wage with the number of years completed.

$740 x 7.75 = $5,735

Based on the calculations, the employee is entitled to severance pay worth $5,735.

The amount may also vary depending on a range of factors, including:

Depending on the termination rules in your province or territory, the maximum severance package you’re allowed to give employees must not exceed 26 weeks of their regular pay.  

How do you pay employees severance allowance?

Employers provide employees severance pay in three ways:

Lump-sum payment

You can issue the employee a cheque or transfer their severance pay into their RRSP or RPP, depending on their choice. If they choose to put it in their RRSP, they must have enough contribution room. By going the RRSP or RPP route, the employee avoids being deducted income tax from the lump-sum payment. They will need to pay taxes when they withdraw later from their accounts.

Lump-sum payments must be made within seven days after the termination of employment or the next payday, whichever is later.

Salary continuance

Here, the employee’s regular pay and benefits continue for a set period after the termination of employment. This type of severance allowance counts on the worker’s income tax just as their regular employment income would.

Regular income tax deductions also apply, including:

  • Canada Pension Plan (CPP) or Québec Pension Plan (QPP) contributions
  • employment insurance (EI) premiums
  • registered pension plans (RPP) contributions

Deferred payments

The least popular option, this is where the employer spreads the payments for over two years or more. The employee is required to pay income tax only on the payments made in a given year. This method may allow the worker to lower the tax they need to pay for each year.

Is severance pay taxable?

Severance pay is taxable in Canada. The amount of taxes deducted from the severance package depends on the payment structure.

Lump sum payments

If the employee chooses to take a lump-sum cheque, you will need to deduct the corresponding income tax. The tax amount will depend on the jurisdiction and how much the severance pay is worth. The higher the lump sum, the higher the withholding tax. 

Here are the withholding rates for lump-sum payments for the year.

Retirement severance pay – withholding tax rates for lump-sum payments in Canada 2024

Employers, however, can’t deduct CPP/QPP contributions and EI premiums from the lump-sum payments.

RRSP/RPP transfer

Employees can avoid withholding taxes if they choose to transfer the entire severance pay to their RRSP or RPP. For the RRSP transfer to happen, the worker must have sufficient contribution room. The funds must also be transferred in the same year they are paid out or within 60 days if received at the end of the year. Any withdrawal from the RRSP, however, will be subject to taxes.

Salary continuance

Taxes on salary continuance work the same as they do on regular employment income. You can also deduct the employee’s CPP/QPP contributions and EI premiums from this type of severance package.

Deferred payments

Deferred payments offer the biggest income tax advantage for employees. Not all employers, however, offer this option. Because the income is spread over multiple years, this may result in a lower marginal tax bracket.

Deferred payments are sometimes subject to interest. If this is the case, the employee will be taxed on any interest that accrues as if it were income.

With all these different layers, severance pay can be a complicated process even for the most experienced HR professionals. One way to get a deeper insight into this matter is by checking out our Employment Law News Section. In this page, you can get breaking news and the views of labour and employment law experts on the latest industry developments. Don’t forget to bookmark this page for easy access.

Should Canadian employees be given retirement severance pay? Why or why not? Let us know what you think in the comments.

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