When an employee leaves your business, you may be responsible for making severance payments. Most importantly, ensure that employees receive their rightful compensation. But, a business owner, you don’t want to lose even more money to taxes. Yes, there are tax implications you should be prepared for before you have to pay severance to an employee. Here’s what you need to know about how to minimize taxes on severance payments.
How Severance Payments Are Taxed In Canada
In Canada, severance payments are taxable income. This means that when an employee leaves your business, you will need to subtract taxes from their payment before releasing it to them. The most important thing to note is that while some types of payments, such as wages and salaries, have a set tax rate, the applicable tax rate on severance payments will depend on the amount paid out to the employee.
Follow The Canada Labour Code Before Anything Else
The Canada Labour Code outlines the procedures to follow when terminating the employment of individual employees. It also covers what to do in the event of a group termination, classified as 50 or more employees (from a single industrial establishment) who are dismissed simultaneously within a 4-week period. According to the Code, employers must provide the employees with reasonable notice before being terminated, or else 2 weeks of full pay must be included instead. This fact alone could easily cost you tens of thousands.
Tips To Keep In Mind When Giving Reasonable Notice
Reasonable notice ensures that the employee is aware of their termination and gives them sufficient time to prepare for their departure.
This written notice should include all the facts and figures associated with the severance package, such as the amount being paid out, the total number of weeks being compensated for, and any other extra benefits (such as vacation pay) that are part of the agreement.
It’s also important to include information about the employee’s rights during and after their employment has been terminated. The notice should explain how long the employee can expect to have access to benefits like medical coverage or life insurance policies. It should also outline what kind of assistance may be available for transitioning into new employment opportunities or further education opportunities.
Finally, the notification letter should also express appreciation for the employee’s contribution to your business. This creates an atmosphere in which both parties feel respected; don’t overlook the power of that, since it will save you from the squabbles that come with an upset employee.
What If You Have To Pay Instead Of Giving Notice?
In most provinces, pay in lieu must be provided to the employee within a particular timeframe, typically a lump sum after seven days of termination (or by the next pay date, whichever is later). When an employee gets compensation in lieu of notice, it should be equivalent to what their normal salary would have been for the length of the notice period.
Important to note: Pay in lieu is subject to Canada Pension Plan (CPP) contributions, employment insurance (EI) premiums, and income tax deductions; deduct these before handing out the pay.
So Now You Know:
By understanding the rules surrounding reasonable notice and pay in lieu of notice, you can take steps to minimize taxes associated with severance payments, while also making sure your employees get their rightful compensation. If it still sounds complicated or tricky to calculate, contact us at Canada Tax Consultants today; we can easily ensure you’re in compliance with all laws and regulations. We have the expertise to help you understand the tax implications and deductions associated with these payments, and to make sure your business is always efficient.
