Severance pay in Canada has two distinct meanings: statutory termination pay (minimum notice or pay in lieu under provincial employment standards) and common law wrongful dismissal damages (reasonable notice based on employment law). Most terminated employees are entitled to both statutory minimums and common law notice — the common law amount is almost always larger and is negotiable. These should not be confused.
Quick Answer
An Ontario employee with 8 years of service earning $90,000/year is entitled to: (1) Statutory termination pay: 8 weeks under Ontario ESA. (2) Statutory severance pay (if employer has $2.5M+ payroll): 8 weeks (1 week per year). (3) Common law reasonable notice: approximately 8-16 months depending on age, position, and ability to find comparable work. The common law component far exceeds the statutory minimum.
Ontario Statutory Entitlements
Termination pay (ESA): 1 week per year of service (maximum 8 weeks) for employees with 3 months+ of service. Paid in lieu of the notice period.
Severance pay (ESA): Applies only if the employer’s Ontario payroll was $2.5 million or more, or the dismissal was a mass termination. Severance = 1 week per year of service (or part year), maximum 26 weeks.
Both termination pay and severance pay are separate and cumulative — an eligible employee gets both.
Common Law Reasonable Notice
Beyond statutory minimums, terminated employees are entitled to reasonable notice at common law (unless just cause is established). Reasonable notice is determined by the Bardal factors:
– Character of employment (seniority, responsibility)
– Length of service
– Age of employee
– Availability of comparable employment in the market
The common law notice period for long-service, senior, or specialized employees can range from 12 to 24 months or more. Common law damages exceed the statutory ESA minimums in almost all cases — negotiating the separation package matters significantly.
Tax Treatment of Severance
Statutory termination pay and ESA severance pay are taxable as employment income — included in the year of receipt, with standard withholding. However, a retiring allowance (which includes some severance payments) can be transferred directly to an RRSP under the “pre-1996 service” exception: $2,000 per year of pre-1996 service can be contributed directly to an RRSP without using RRSP room. Post-1996 service contributions count against regular RRSP room.
Verified Against Source
Ontario termination and severance pay minimums are in the Employment Standards Act, 2000, sections 57-64. The common law reasonable notice doctrine originates in Bardal v. Globe and Mail Ltd. (1960), 24 DLR (2d) 140. CRA retiring allowance rules are in ITA s.60(j.1). Source: ontario.ca/page/termination-pay and ontario.ca/page/severance-pay
Frequently asked questions
- What is the difference between termination pay and severance pay in Ontario?
- Ontario has two separate entitlements: (1) Termination pay under the ESA: 1 week per year of service (max 8 weeks) — required for all employees with 3+ months of service. (2) Severance pay under the ESA: 1 week per year of service (max 26 weeks) — only applies when the employer's payroll exceeds $2.5 million or in mass layoffs of 50+ employees. Both are separate and cumulative.
What is common law reasonable notice?
Common law reasonable notice is the notice period a dismissed employee is entitled to beyond the ESA statutory minimum, based on employment law principles developed through court decisions. The amount depends on character of employment, length of service, age, and availability of comparable work. For senior employees with long service, reasonable notice often ranges from 12 to 24 months of base salary.
How is severance pay calculated in Ontario?
Ontario ESA severance pay = weeks of service (completed years + partial years, each counting as 1) x 1 week of regular wages. Maximum 26 weeks. The employer must have Ontario payroll over $2.5 million or it must be a mass termination (50+ employees). Severance pay is separate from termination pay and both may be owed.
Is severance pay taxable in Canada?
Yes. Severance pay and termination pay are taxable as employment income in the year received. The employer withholds tax at source. However, certain severance structured as a retiring allowance may be transferable to an RRSP directly — $2,000 per year of pre-1996 service — reducing the immediate tax hit. Any amount not transferred is included in income.
What is a retiring allowance?
A retiring allowance is a payment on or after retirement in recognition of long service, including some severance payments. A portion ($2,000 per year of service before 1996) can be transferred directly to an RRSP without using RRSP room. This reduces current-year taxable income. Post-1995 years of service do not qualify for this special transfer — those amounts use regular RRSP room.
Can my employer fire me without any notice or severance?
Only for just cause (serious misconduct). Without just cause, employers must provide working notice or pay in lieu — at minimum the ESA statutory amounts. Failure to do so entitles the employee to file a claim with the Ministry of Labour (for statutory amounts) or sue in court for common law wrongful dismissal damages. Most employment lawyers offer free initial consultations.
Should I sign the severance offer my employer gave me?
Do not sign a severance release without legal advice if the amount is significant. By signing a release, you waive common law claims beyond the statutory minimums. Common law entitlements (reasonable notice) frequently exceed statutory amounts by 5-10x for mid-career employees. Employment lawyers often offer contingency-based services for wrongful dismissal claims.
What is the ESA statutory minimum for termination in BC?
BC Employment Standards Act requires 1 week of notice per year of service (minimum 1 week after 3 months, maximum 8 weeks after 8 years). BC does not have a separate severance pay provision like Ontario — only termination pay. Common law reasonable notice entitlements beyond ESA minimums still apply in BC as in all provinces.
Does federally regulated employees get more severance?
Federal employees (banks, airlines, telecoms) are covered by the Canada Labour Code, which provides: 2 weeks notice (1-3 years), 1 additional week per year of service beyond 2 years (maximum is common law based). The CLC also provides unjust dismissal protection for non-managerial employees with 12+ months of service — they can apply for reinstatement, not just damages.
Can I collect EI while receiving severance pay?
EI may be delayed if you receive a lump sum severance that is allocated to a notice period. If the employer provides working notice (you work through the period) with no lump sum, EI can begin when employment ends. Statutory severance pay (Ontario ESA) does not delay EI. Common law damages paid as a lump sum are allocated as wages for the period they cover, potentially delaying EI entitlement.
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