andresr/iStockPhoto / Getty Images
As more businesses signal potential layoffs in the year ahead, some Canadians may find themselves suddenly unemployed and unsure whether their severance package could help keep their finances on track.
The Bank of Canada’s fourth-quarter 2025 Business Outlook Survey, conducted from Nov. 6 to 26, found that 21 per cent of businesses are expecting to reduce staff, the highest level since 2016. Most businesses do not plan to expand their work force over the next 12 months, according to the survey.
When it comes to how to most effectively use your severance, financial planners say the right move depends on a few key factors: how financially prepared you are for unemployment, when the layoff occurs and how long your job search is likely to take.
Stress Test podcast: You've just been let go. Now what?
“Severance is generally meant to help cover the period of unemployment while you’re searching for work,” said Kaitlyn Douglas, a certified financial planner in Winnipeg. In Canada, severance is treated as taxable income.
That tax treatment is one reason timing matters. Ms. Douglas said people laid off near the end of the calendar year may already have close to a full year of earnings, and then the severance is added on top. “That could put them in a higher tax bracket,” she said.
In such situations, some people consider contributing a portion of their severance to a registered retirement savings plan to reduce their taxable income. Others ask their employer whether some or all of the payment can be deferred until the following calendar year, which can spread income over two tax years and create more planning flexibility.
Deferring income can also buy time, Ms. Douglas said. If someone finds a new job quickly, they may end up receiving severance while earning a salary again, allowing them to invest leftover funds with more confidence. If the job search takes longer than expected, the severance may need to function as a paycheque replacement rather than a tax-planning opportunity.
How do you know if your severance package is fair?
Ms. Douglas cautioned that if severance is contributed to an RRSP and later withdrawn, the contribution room is lost.
The situation can look different for people laid off early in the year. With a lower total annual income, RRSP deductions may be less valuable, said Simon Wong, a certified financial planner and head of financial planning at Blueprint Financial based in Calgary.
“Flexibility in cash flow matters a lot more if you’re laid off early in the year,” Mr. Wong said.
In those cases, some people may choose to place severance in a more flexible account, such as a tax-free savings account. “Having access to that money without any tax consequences is great,” Mr. Wong said. Withdrawals from a TFSA also do not affect employment insurance benefits, he said.
The Canada Revenue Agency says you can receive your severance pay in a lump sum, a salary continuance or deferred payments over several years.
If you receive a lump sum, it’s taxed at a higher rate, while a salary continuance is taxed at the source as if you were still employed.
Financial Facelift: Laid off with $2.5-million in savings, should Jake and Wanda retire permanently?
A risk arises if someone invests most or all of their severance and remains unemployed longer than expected, particularly if they don’t already have an emergency fund.
“Cash is your best friend at that point, because you have no other income coming in,” said Adam Jenkins, a certified financial planner in Kingston.
Ideally, people would already have three to six months’ worth of living expenses set aside in an emergency fund, but that isn’t the reality for many Canadians, Mr. Jenkins said. If someone does choose to invest part of their severance, it should be money they are confident they won’t need in the short term, he said.
That caution is especially relevant if layoffs are concentrated in a specific industry. “You’re not necessarily going to get the same sort of job that you currently have,” Mr. Jenkins said.
