Annie Chong, manager of Carswell’s payroll consulting group, fields questions from readers
Question: Is severance pay required when terminating an employee?
Answer: It depends on the jurisdiction in which the employee works, since severance pay is governed by employment and labour standards legislation. Severance pay is an amount paid to employees when or after they retire in recognition of long service or for the loss of a job. It is paid in addition to the required notice or wages in lieu of notice (also called termination pay). In Ontario and under the Canada Labour Code, severance pay is a requirement if certain conditions are met. No other jurisdictions require employers to pay it.
Under the Canada Labour Code, employees who have completed 12 consecutive months of continuous service with their employer and who are terminated by the employer must receive severance pay, unless they are dismissed for just cause. Employees are not entitled to severance pay if, either upon or before termination, they are entitled to receive pension benefits under a company registered pension plan (where there was an employer contribution), Old Age Security or a retirement pension under the Canada/Quebec Pension Plan.
Under the Employment Standards Act, 2000, in Ontario, employees are eligible for severance pay if their employment has been severed and they have five or more years of service with their employer (this includes all time spent with the employer, whether or not the employment is continuous or active) and the employer’s annual Ontario payroll is at least $2.5 million or the employer has severed the employment of at least 50 employees in a six-month period due to all or a portion of the business closing.
Severance in Ontario refers to situations in which:
•an employer dismisses an employee or otherwise refuses or is unable to continue the employment relationship
•an employer constructively dismisses an employee and, as a result, the employee resigns within a reasonable time period
•an employer lays off an employee for 35 weeks or more in any period of 52 consecutive weeks
•an employer lays off an employee because the employer is permanently ceasing business at the workplace
•an employer gives the employee proper notice of termination and the employee gives the employer at least two weeks’ written notice before resigning and the employee’s resignation notice takes effect during the required notice period.
Not all employees are entitled to severance pay. For a list of exceptions in Ontario, please refer to 20.9.4, Severance Pay.
Some employers, in other jurisdictions, choose to pay severance pay. Employers may also have severance pay requirements under a collective agreement or employment contract.
For more information on severance pay, please refer to 1.15, Severance Pay; 20.1.3, Wages and Termination (Canada Labour Code); and 20.9.4, Severance Pay (Ontario).
Retiring allowances and rehired employees
Question: Last year, the employment of one of our employees was terminated. At the time, we paid the employee a retiring allowance, as well as wages in lieu of notice. Circumstances have changed and we are now rehiring the employee. Is the amount we paid last year for the retiring allowance still considered a retiring allowance or is it employment income now that the employee is returning to work for us?
Answer: Generally speaking, the answer depends on whether or not the employer and the employee agreed before the termination that the employee would be rehired. For a payment to qualify as a retiring allowance, it must be paid in recognition of long service or for the loss of an office or employment. In the Interpretation Bulletin entitled Retiring Allowances (IT-337R4), the Canada Revenue Agency (CRA) states the loss of an office or employment does not include being terminated by the employer and then rehired by the employer or an affiliate (either full time or part time) if the agreement to rehire the employee was made before the termination (the CRA says there are some rare exceptions to this).
In a recent CRA View on the subject, the agency reiterated its position. It noted if the employee who received the retiring allowance did not have any assurance at the time of termination, he would be re-employed by the former employer, “the treatment of the payment as a retiring allowance will not be adversely affected where the employee is rehired by the former employer, in the same year or at a later time when circumstances have changed.”
Readers should keep in mind the CRA’s position on retiring allowances is that whether or not a payment is a retiring allowance “is a question of fact that can only be determined after a review of the employment contract, and all other facts relevant to the particular situation.”
The CRA View (#2010-0362821E5, Retiring Allowance and Re-employment) is available on Carswell’s online subscription-based service Taxnet Pro.
Annie Chong is manager of the payroll consulting group at Carswell, a Thomson Reuters business, which publishes the Canadian Payroll Manual and operates the Carswell Payroll Hotline. She can be reached at [email protected] or (416) 298-5085.
Answer: It depends on the jurisdiction in which the employee works, since severance pay is governed by employment and labour standards legislation. Severance pay is an amount paid to employees when or after they retire in recognition of long service or for the loss of a job. It is paid in addition to the required notice or wages in lieu of notice (also called termination pay). In Ontario and under the Canada Labour Code, severance pay is a requirement if certain conditions are met. No other jurisdictions require employers to pay it.
Under the Canada Labour Code, employees who have completed 12 consecutive months of continuous service with their employer and who are terminated by the employer must receive severance pay, unless they are dismissed for just cause. Employees are not entitled to severance pay if, either upon or before termination, they are entitled to receive pension benefits under a company registered pension plan (where there was an employer contribution), Old Age Security or a retirement pension under the Canada/Quebec Pension Plan.
Under the Employment Standards Act, 2000, in Ontario, employees are eligible for severance pay if their employment has been severed and they have five or more years of service with their employer (this includes all time spent with the employer, whether or not the employment is continuous or active) and the employer’s annual Ontario payroll is at least $2.5 million or the employer has severed the employment of at least 50 employees in a six-month period due to all or a portion of the business closing.
Severance in Ontario refers to situations in which:
•an employer dismisses an employee or otherwise refuses or is unable to continue the employment relationship
•an employer constructively dismisses an employee and, as a result, the employee resigns within a reasonable time period
•an employer lays off an employee for 35 weeks or more in any period of 52 consecutive weeks
•an employer lays off an employee because the employer is permanently ceasing business at the workplace
•an employer gives the employee proper notice of termination and the employee gives the employer at least two weeks’ written notice before resigning and the employee’s resignation notice takes effect during the required notice period.
Not all employees are entitled to severance pay. For a list of exceptions in Ontario, please refer to 20.9.4, Severance Pay.
Some employers, in other jurisdictions, choose to pay severance pay. Employers may also have severance pay requirements under a collective agreement or employment contract.
For more information on severance pay, please refer to 1.15, Severance Pay; 20.1.3, Wages and Termination (Canada Labour Code); and 20.9.4, Severance Pay (Ontario).
Retiring allowances and rehired employees
Question: Last year, the employment of one of our employees was terminated. At the time, we paid the employee a retiring allowance, as well as wages in lieu of notice. Circumstances have changed and we are now rehiring the employee. Is the amount we paid last year for the retiring allowance still considered a retiring allowance or is it employment income now that the employee is returning to work for us?
Answer: Generally speaking, the answer depends on whether or not the employer and the employee agreed before the termination that the employee would be rehired. For a payment to qualify as a retiring allowance, it must be paid in recognition of long service or for the loss of an office or employment. In the Interpretation Bulletin entitled Retiring Allowances (IT-337R4), the Canada Revenue Agency (CRA) states the loss of an office or employment does not include being terminated by the employer and then rehired by the employer or an affiliate (either full time or part time) if the agreement to rehire the employee was made before the termination (the CRA says there are some rare exceptions to this).
In a recent CRA View on the subject, the agency reiterated its position. It noted if the employee who received the retiring allowance did not have any assurance at the time of termination, he would be re-employed by the former employer, “the treatment of the payment as a retiring allowance will not be adversely affected where the employee is rehired by the former employer, in the same year or at a later time when circumstances have changed.”
Readers should keep in mind the CRA’s position on retiring allowances is that whether or not a payment is a retiring allowance “is a question of fact that can only be determined after a review of the employment contract, and all other facts relevant to the particular situation.”
The CRA View (#2010-0362821E5, Retiring Allowance and Re-employment) is available on Carswell’s online subscription-based service Taxnet Pro.
Annie Chong is manager of the payroll consulting group at Carswell, a Thomson Reuters business, which publishes the Canadian Payroll Manual and operates the Carswell Payroll Hotline. She can be reached at [email protected] or (416) 298-5085.
