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Layoffs in Canada — How to Turn a Severance Package into a Financial Advantage

Part 2. Practical Decisions and Real Numbers

Layoffs in Canada — How to Turn a Severance Package into a Financial Advantage

Introduction

In Part 1, I explained why a layoff in Canada is not only a stressful life event, but also a moment when proper financial and tax planning can meaningfully improve long-term outcomes.

In Part 2, we move from theory to practice — what decisions were actually made and what measurable financial impact they produced.

Let’s continue Vadim’s story.

 

Step 1 — Debt Optimization: Paying Off an Expensive Truck Loan

One of the first steps was addressing high-interest debt, which delivered the fastest and most predictable financial benefit.

Loan Details at the Time of Layoff

Vadim had a truck loan with the following characteristics:

  • outstanding balance: approximately CAD 40,000
  • interest rate: 8.5% annually
  • remaining term: about 5 years
  • payments made from after-tax income

What This Loan Really Meant in Numbers

At an interest rate of 8.5%:

  • annual interest cost was approximately CAD 3,400,
  • total remaining interest over the life of the loan was about CAD 8,500–9,000,
  • not accounting for inflation or cash-flow pressure.

At the same time:

  • savings were held in a savings account earning 1–2%,
  • interest was tax-free because the account was held within a TFSA,
  • however, after inflation, the real return was still negative.

The Decision

The truck loan was fully paid off using previously accumulated savings.

Financial impact:

  • reduction of future interest costs by approximately CAD 8,500,
  • equivalent to a risk-free 8.5% return,
  • improved monthly cash flow,
  • reduced financial and emotional stress.

Important note: this decision was made as part of an integrated financial plan and may not be appropriate for every situation.

Step 2 — Tax-Efficient Use of the Severance Package and RRSP

The next critical area was tax planning.

Severance Package and Taxation in Canada

Vadim received a severance package of:

  • approximately CAD 42–43,000 before tax,
  • around CAD 30,000 net after employer withholding.

In Canada, severance pay is taxed at a higher withholding rate, as it is treated as additional income for the year.

The Strategy — RRSP Contribution

The entire severance amount was contributed to an RRSP, as sufficient RRSP room was available.

For illustration:

  • RRSP contribution: CAD 42,000,
  • marginal tax rate: approximately 38–40% (typical for BC at this income level).

The Tax Result

  • expected tax savings: approximately CAD 11,000–12,000

This amount:

  • may be received as a tax refund,
  • or reduce total taxes payable for the year,
  • or offset taxes already withheld from the severance payment.

In other words, the money was not lost to taxes, but continued to work inside a registered retirement plan.

 

Important Clarification — Access to RRSP Funds

An RRSP is not “locked away forever.”

Funds can be withdrawn at any time, subject to taxation in the year of withdrawal.

This can be advantageous if:

  • income is temporarily lower,
  • the job search takes longer than expected,
  • or the individual falls into a lower tax bracket in a future year.

Key concept:
tax savings are captured today at a higher marginal rate,
while withdrawals may occur later at a lower rate.

This is a legitimate and widely used tax-planning strategy in Canada.

 

Step 3 — Rebuilding the RRSP Investment Structure

Before our work together, Vadim’s RRSP reflected a typical group RRSP setup:

  • a collection of funds without a unified strategy,
  • limited cost transparency,
  • little alignment with long-term goals.

We:

  • reviewed asset allocation,
  • optimized investment selection,
  • aligned the RRSP strategy with risk tolerance, time horizon, and tax efficiency.

An RRSP is not just a tax deferral tool — it is a core component of a long-term financial plan.

 

Step 4 — Financial Planning for a New Reality

A layoff changes:

  • income stability,
  • planning horizons,
  • acceptable risk levels.

As part of the planning process, we developed:

  • 1–3 year financial scenarios,
  • plans for both short and extended job searches,
  • clear guidelines for spending, reserves, and investing.

The result was greater clarity and reduced uncertainty.

 

Summary — The Numbers That Matter

Through disciplined planning and execution:

  • future interest costs were reduced by approximately CAD 8,500,
  • tax savings of CAD 11,000–12,000 were achieved through RRSP planning,
  • monthly cash flow improved,
  • overall financial resilience increased.

 

Final Thought

In Canada, a layoff is not necessarily a financial setback.
With proper financial and tax planning, it can become a turning point toward greater long-term stability.

 

What’s Next

In Part 3, I will explain what additional steps we took to further strengthen the client’s financial health, and I will break down the five most expensive mistakes people make after a layoff in Canada — mistakes that often cost tens of thousands of dollars.

 

Translation of the article into Russian: Увольнение в Канаде: как использовать severance и RRSP | Часть 2

Mykhailo Arbetov, CFP, FMA
Financial Advisor & Planner (Vancouver)
Certified Financial Planner — Michael Arbetov

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