# Severance packages and RRSP contributions



## Northern Bob (Feb 24, 2015)

I received a surprise at work last week. I was laid off, or terminated without cause, as it was called. There had been several rounds of layoffs, so it shouldn't have been all that surprising I guess. I've been with the company for 23 years and I'm 58. I've been reading the severance package and the payment package. I've also searched a bit on this forum and just wanted to confirm something. 
If the payment (not the mandatory 8 weeks) is considered like employment income shouldn't I be able to contribute 28% to my RRSP even if I don't have contribution room? The search showed some posts that indicated that you must have existing room for making a contribution but they were a bit dated. I worked in the oil and gas industry and it is unlikely that I'll find a job in my field, and even if available I have to sign a non compete agreement. Contribution room won't do a lot of good if I have a low income. 
There was also the $2000 per year prior to 1996 that would give me $6000 room, but that isn't much.


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## Danny (Oct 17, 2012)

Not sure what your severance offer was? Have you looked into any legal advice on whether its a fair offer? I may be in your situation soon. Roughly same age and years service. You may want to check this out as a quick reference. 

http://www.severancepaycalculator.c...WCgSALZ20ljI5AiSjAWH-OVmbaOuKMguv0aAsxZ8P8HAQ


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## Northern Bob (Feb 24, 2015)

Thanks for the reply, Danny. I have an appointment with an employment lawyer tomorrow. The dollar value is in the ballpark of the calculator. Do you include the 8 weeks mandatory notice on top of the severence? My job description is a bit hard to pigeon hole as well. I'm in Alberta.


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## ian (Jun 18, 2016)

My guess is that should should get anywhere from 9-20 months depending on your position. I would not engage the lawyer on a contingency basis either-go with fees and disbursements. If your former employer was a large firm I suspect that you settlement will be fairly quick. You should also receive your benefit package for the length of your severance settlement.

When I did mine I took the severance as salary contingency until year end, then the balance in the following year in order to avoid taxes. This assumes your former employer is in not going to go into bankruptcy like Nortel. My lawyer also negotiated his fee into the deal on top of the package. Keep all your docs because that legal fee can be written off on your tax return.

My lawyer also advised me to register for EI immediately. If you do not go back to work, your EI will start after the severance period has been exhausted. In my case it was 21 or 22 months. Then I was entitled to, and received, 38 weeks of EI.

Good luck.


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## Northern Bob (Feb 24, 2015)

Thanks Ian. Good to know on the contingency/fees with the lawyer. I was wondering how that would work. The first visit and opinion on whether to go with a demand letter or sign off on it is a flat rate. My benefits only go 30 days, but we'll see what the lawyer says about that. It is a large company and no chance of it going under.


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## Eclectic12 (Oct 20, 2010)

Northern Bob said:


> ... I was laid off, or terminated without cause, as it was called ...


Sorry for the job loss.




Northern Bob said:


> ... If the payment (not the mandatory 8 weeks) is considered like employment income shouldn't I be able to contribute 28% to my RRSP even if I don't have contribution room?


I'm not an expert so hopefully those with more experience will speak up.

This CRA link splits it up into "eligible" and "non-eligible".
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/trnsfrrng/rtrng-eng.html

The "non-eligible" part says 


> The non-eligible part can be contributed to your RRSP or to a spousal or common-law partner RRSP, up to the amount of your available RRSP deduction limit.


This seems to imply that the "eligible" part does not need RRSP contribution room. 

The eligible part says 


> You can only transfer the eligible part of your retiring allowance to your own RPP, SPP, RRSP or PRPP.
> 
> The eligible part is:
> $2,000 for each year or part-year of service *before 1996* in which you were employed by the employer or a person related to the employer from whom you received the retiring allowance.
> ...


Without other links or someone with experience commenting, it is sounding like only about $6K can be transferred to the RRSP, without using RRSP contribution room.




Northern Bob said:


> ... Contribution room won't do a lot of good if I have a low income ...


Won't that depend on what the withdrawal rate is at?

If the withdrawal is at a lower rate than when the severance was paid, it is still a benefit versus paying more taxes.


Cheers


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## birdman (Feb 12, 2013)

Another possible option, albeit it may be difficult to negotiate, is to have your severance paid out as a SERP (supplemental Employee Retiremen). I retired early after doing a merger and had my severance paid out over 14 yrs with interest of course. Worked out well as interest rates were in the 6 -7 %. Unfortunately, the 14 yrs is almost over.


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## nobleea (Oct 11, 2013)

Non-compete agreements are pretty useless in the case of a laid off worker. No court will side with a company when a laid off worker, struggling to make payments, manages to get a job with a competitor or related company.

We're in the oil industry and have seen our share of layoffs. For professionals that have been with the company 5yrs or more, the going rate is just over 3 weeks per year of service. It is paid out as regular paycheques, biweekly, and it stops as soon as another job is obtained (even if you didn't hit the full severance amount).


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## gibor365 (Apr 1, 2011)

Eclectic12 said:


> Sorry for the job loss.
> 
> 
> 
> ...


It says "_$2,000 for each year or part-year of service before 1996 in which you were employed by the employer_"

Does it mean that if I worked for 13 years and 3 weeks, my elegible portion is 28K?


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## twa2w (Mar 5, 2016)

Yes if those were before 1996 and run over 14 calendar years.
1996 does not count.
I suspect you are looking at 13 years or 26000.
You can also trasnfer 1500 more for each year before 1989 where you were nit in oension or deferred profit plan.
All this must be transferred directly. There is a process for this and a special transfer form.
Your employer should let you know the amounts


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## My Own Advisor (Sep 24, 2012)

Sorry for the loss. 23 years? Likely at least 12 months if not closer to 15 months would be about right. I think anything closer to 20 months severance like a comment I read above is crazy good.

Definitely keep your legal fees in check and accounted for; all legal fees can be a tax deduction on your return.

Smart call on registering for EI immediately in any layoff situation. 
http://www.servicecanada.gc.ca/eng/ei/application/applying_for_benefits.shtml


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## Eclectic12 (Oct 20, 2010)

gibor365 said:


> It says "_$2,000 for each year or part-year of service before 1996 in which you were employed by the employer_"
> Does it mean that if I worked for 13 years and 3 weeks, my elegible portion is 28K?


The way I read the link, if year 1 was 1981 ... then I believe so. 

With the date range the OP lists for their employment, the OP and I read this as $6K is available.


Cheers


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## gibor365 (Apr 1, 2011)

> Yes if those were before 1996 and run over 14 calendar years.
> 1996 does not count.


 Oh, damn .... i didn't pay attention on *before 1996*. So if I started to work after 1996 , I cannot transfer nothing to RRSP?!


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## gibor365 (Apr 1, 2011)

So, I understand that the best time to get laid off is beginning of the year and worst time - end of the year... big lump sum and no RRSP room .

When my wife was offered package some time ago, she consulted lawyer who said that court looking at 3 things:
1. Age (obviously the older- the better)
2. Seniority
3. Position (how easy for a person to find another job).

On the other hand, a lot depends on the contract.... when Indian company bought us , they ask us to resign a new contract... it had a clause telling that in case of laid off , all compensation will be paid accordingly to provincial standards (and nobody from employees noticed it)... 
When I mentioned it to lawyer, he said that it would be rather difficult to get more from employer than standard says (1 week termination for 1 year , up to 8 weeks and 1 week of severance for 1 year service.


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## Eclectic12 (Oct 20, 2010)

gibor365 said:


> ... if I started to work after 1996 , I cannot transfer nothing to RRSP?!


Under these provisions ... nothing can be transferred as an eligible part, which does not require RRSP contribution room be available. 
Whether one calls it an "ineligible part" or plain old RRSP contribution, where one has RRSP contribution room available - a contribution (and it's matching deduction) can be made.


It wouldn't surprise me if the *before 1996* date is shifted over time but as I wasn't concerned about the choices for severance years ago, I can't say for sure. :biggrin:


As I say, I am not sure if there are other provisions that might come into play. The only one that is similar that I have experience with is taking the proceeds from a pension to open a LIRA or add to a LIRA. For the eligible portion, no RRSP contribution room was needed.


Cheers


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## Eclectic12 (Oct 20, 2010)

gibor365 said:


> So, I understand that the best time to get laid off is beginning of the year and worst time - end of the year... big lump sum and no RRSP room.


In general ... unless maybe arrangements can be made to pay the severance the following tax year (or something like post #7).

Will there really be no RRSP contribution room though?

There's income for the year so there should be some (might be small compared to the severance). Then too, if there is a pension - the pension adjustment reversal (PAR) will eventually give RRSP room back.
https://www.retirementadvisor.ca/retadv/apps/articles/primer6.jsp?learningMenu=primer


Cheers


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## gibor365 (Apr 1, 2011)

> In general ... unless maybe arrangements can be made to pay the severance the following tax year (or something like post #7).
> 
> Will there really be no RRSP contribution room though?
> 
> There's income for the year so there should be some (might be small compared to the severance).


Not sure about my case ... My Group RRSP is 15% of salary... my understanding that benefits continue during termination/severance pay .. not sure if Group RRSP is considered part of the benefits


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## Eclectic12 (Oct 20, 2010)

Where there's 15% of salary going in ... your are probably correct there will be almost nothing or nothing available.

Which puts one back to "get laid off early in the year" scenario ... barring some other provision.


Cheers


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## Beaver101 (Nov 14, 2011)

frase said:


> Another possible option, albeit it may be difficult to negotiate, *is to have your severance paid out as a SERP *(supplemental Employee Retiremen). *I retired early after doing a merger and had my severance paid out over 14 yrs with interest of course*. Worked out well as interest rates were in the 6 -7 %. Unfortunately, the 14 yrs is almost over.


 ... are you certain it is "severance" pay or is it an annuity of your early pension? If the OP is going to negotiate this option (and only provided his/her employer has such a plan), he/she would want to sure the compnay will be around to pay these severance tidbits in a decade plus.


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## Northern Bob (Feb 24, 2015)

Thanks for all the info everyone. I talked to the lawyer and he said the lump sum offer was very good. In fact, he said he re-read it several times because he thought it might be a typo. Usually he would have to do the demand letter and sue to get there, so I'll sign it. He said there might be a few small things that could be argued with a threatened suit but it would cost most of the gain to proceed. With the company RPP and my matching and voluntary RRSP contributions coming off each pay check I was running right up on the contribution limit, so other than the $6K I guess I'm not going to be able to shelter much. I don't mean to complain, those are the rules and I should have checked into it.
I misspoke when I called it a noncompete agreement. It's more just a nondisclosure agreement. Don't reveal trade secrets or confidential information. Not a big deal.


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## gibor365 (Apr 1, 2011)

> I talked to the lawyer and he said the lump sum offer was very good. In fact, he said he re-read it several times because he thought it might be a typo. Usually he would have to do the demand letter and sue to get there, so I'll sign it.


 Just curious if you paid lawyer for this consultation?


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## Northern Bob (Feb 24, 2015)

Yes, I did pay for it.


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## Eclectic12 (Oct 20, 2010)

Northern Bob said:


> ... With *the company RPP * ...
> I don't mean to complain, those are the rules and I should have checked into it.


Assuming it isn't worth staying in the plan, leaving the RPP should mean a pension adjustment reversal (PAR). The PAR will give you RRSP room back. It might be worth a call to CRA to get an estimate. You can make the RRSP contribution until something like the 60th day of 2017 where the deduction can apply to the filed 2016 tax return.

The hard part is to get a reasonable enough estimate before this deadline to make a contribution plus be reasonably confident one is not exceeding the real number by more than $2K. Unless the employer and CRA are confident of a quick turnaround to get the PAR calculated then to you, potentially over-contributing with the thought of dealing with it by withdrawing it quickly, may not be a good plan. In my case, one year became two years due to weather issues ... but that was when the PAR was new so calculations should be a lot more documented and understood now that it is years later.


Hopefully you have our T4s from 1990 onwards. Box 52 has the pension adjustment (PA) that according to the link from post # 16, would need to be added up with any lump sum transfers to a LIRA subtracted off (it does not sound like there would be any).


This CRA example says that where one is terminated plus leaves the RPP in the same year, the PAR is applied to that tax year. It sounds like with a termination mid-2016, there should be plenty of time to leave the RPP, triggering a PAR to be granted.
http://www.cra-arc.gc.ca/tx/rgstrd/papspapar-fefespfer/par-fer/menu-eng.html

Here is the more detailed link that discusses the different types of plans.
http://www.cra-arc.gc.ca/E/pub/tg/rc4137/rc4137-09-e.html


Cheers


*PS*

If I am reading CRA's money purchase example correctly, the good news part is that it likely won't take long to have it figured out/estimated. The bad news is that compared with the more complicated DB amount, it may not be large.


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## gibor365 (Apr 1, 2011)

Eclectic12 said:


> Where there's 15% of salary going in ... your are probably correct there will be almost nothing or nothing available.
> 
> Which puts one back to "get laid off early in the year" scenario ... barring some other provision.
> 
> ...


I think the only small "tax break" is overcontribution to RRSP, as far as I remember, there is no penalty for overcontribution up to $2,000


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## Northern Bob (Feb 24, 2015)

Thanks for the heads up on the PAR, Eclectic. I think I'm going to go to a tax professional and dump it in their lap. I'd rather pay a bit and get it right.


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