Strategic Response to Government Layoffs

Barbara Britto

Receiving a pink slip can be a traumatic event regardless of the workplace. Currently however, federal government layoff discussions are causing uncertainty as departments face budget cuts and restructuring. With proper planning, particularly during tax season, employees can turn this challenge into an opportunity for financial growth and career advancement. Consider the following checklist for conversation starters:

1. Severance payments are taxable but can be transferred to Registered Savings Plans. When Canadians leave a long-term employer, they may get a retiring allowance (severance pay), which is taxable. However, the Canada Revenue Agency (CRA) lets eligible portions be transferred directly into retirement savings plans for tax deferral. This is calculated as follows:

• $2,000 per year (or part-year) of service before 1996 with the employer or a related employer.
• Additional $1,500 per year (or part-year) of service before 1989 without vested pension or DPSP benefits from employer contributions.

Age Restrictions. If you are 71 or older at year-end, you cannot transfer eligible amounts to an RRSP because these plans must be collapsed by the end of the year in which you turn 71.

How is it reported on tax slips and transfers made. Retiring allowances are reported on tax slips as follows: The T4 slip includes Box 66 for the eligible amount and Box 67 for the ineligible amount. For the T3 slip, Box 47 is used to report the eligible amount.

Transfers. You may transfer a retiring eligible allowance directly to an RRSP, RPP, SPP, or PRPP. Transfers to a spouse’s or common-law partner’s RRSP are not allowed.

If the employer moves the eligible part of the retiring allowance directly into an RRSP, RPP, SPP, or PRPP, there is no tax withheld, and this transfer does not reduce the RRSP contribution room. However, transfers to an RPP might lead to a Pension Adjustment that could impact future contribution room. The money then continues to grow tax‑deferred inside the plan.

The non-eligible portion can be contributed to an RRSP or a spousal/common-law partner RRSP, up to the limit of contribution room.

If informed of contribution room, an employer can deposit the non-eligible portion directly into an RRSP or a spouse/common-law partner's RRSP without tax being withheld. If the cash is received and then contributed, tax will be withheld by the employer.

Example Scenario: An employee is let go and receives a lump-sum severance payment of $70,000. On her T4 slip, Box 66 (Eligible retiring allowance) shows $40,000, while Box 67 (Ineligible retiring allowance) shows $30,000.

Options: Transfer the $40,000 eligible amount directly to an RRSP to avoid tax. Then, based on available contribution room, consider contributing any of the $30,000 ineligible amount to either an individual or spousal RRSP.

2. Maximize TFSAs for Flexibility and Tax‑Free Growth. The Tax-Free Savings Account (TFSA) lets you withdraw funds tax-free, making it useful for emergencies or medium-term investments. Individuals can invest in various assets like stocks, ETFs, bonds, or high-interest savings. Gains, dividends, and withdrawals are not taxed, offering flexibility if  income changes.

TFSA contribution room increases yearly and updates with withdrawals. A TFSA can serve as a financial cushion during uncertain times.

3. Explore Educational Opportunities with your Client. Layoffs can be difficult but also offer chances for growth. Government workers may access training funds, educational benefits, or retraining programs. Consider:

• Short-term certifications in areas like finance, project management, data analysis, cybersecurity, or digital communications. 
• Private Vocational Schools. Be sure to consider Knowledge Bureau vocational programs for entry into the tax accounting and financial services.
• College/university courses relevant to new job trends
• Online platforms for flexible, affordable skill-building

Education brings tax advantages such as tuition credits, the Canada Training Credit, and the Lifelong Learning Plan can be accessed for tax free funds. Employer-sponsored training can further reduce costs and enhance career opportunities. 

Also options for those on Employment Insurance can include self-employment opportunities.

4. Explore Business and Self‑Employment Opportunities

Career transitions can drive innovation, as public sector skills like organization, communication, policy analysis, and project coordination transfer well to consulting, freelancing, or business.  Potential options:

• Offer consulting in your area of expertise.
• Start a service-based business.
• Support writing, editing, or communications projects.
• Develop and sell digital products or online courses.

Self‑employment also comes with tax advantages, such as deducting business expenses, home‑office costs, and professional development. Even a part‑time business can create supplemental income and open new doors. Discuss this in detail with your client.

The Bottom Line. Government layoffs may lead to short term financial instability, but they present an opportunity to reevaluate your client’s financial situation and career trajectory. Utilizing RRSP and TFSA plans, EI funding, investing in further education, and exploring entrepreneurial ventures can help transform uncertainty into growth.

Consider the various courses and pathways offered by Knowledge Bureau for achieving specialized designations, ranging from short-term to long-term options. For guidance on tax strategies, it is advisable to consult with a qualified financial and tax advisor.