Payments of wages in lieu of termination notice

You may pay your employee wages in lieu of termination notice either under the terms of their employment contract or federal, provincial, or territorial employment standards.

On this page

• Steps
• References

Steps

1. Determine if the amount of wages paid in lieu of termination notice is considered employment income

   If you pay your employee an amount in lieu of termination notice, the amount is considered employment income, whether or not it is paid on termination of employment. The payment is to compensate your employee for not receiving the required notice period under their employment contract or applicable federal, provincial or territorial legislation.

   What if damages for loss of employment and wages in lieu of termination notice are paid

   • If you made a lump-sum payment that includes wages in lieu of termination notice and damages for loss of employment, the portion of the payment for:
     • Wages in lieu of termination notice is considered employment income
     • Damages are generally considered a retiring allowance
   • If you made a lump-sum payment to your employee and there is no breakdown of the amounts, the full amount would generally be considered a retiring allowance

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   •  If the portion of the payment may be considered a retiring allowance, do not continue to the next step.

     Learn more: Payments of retiring allowances

   • If the portion of the payment is considered wages in lieu of termination notice, continue to: Step 2 – Withhold payroll deductions

2. Withhold payroll deductions

   You must withhold the following deductions:

   • Income tax – Calculate using the bonus or irregular payments method

     Learn more: Calculate income tax deductions

   • EI premiums – Calculate in the same manner as you would for a regular salary

     Learn more: Calculate EI premiums deductions

   • CPP contributions – Calculate in the same manner as you would for a regular salary

     Learn more: Calculate CPP contributions deductions

3. Report the payment on a T4 slip

   You must report the following on the T4 slip:

   • Box 14 – Employment income
   • Box 24 – EI insurable earnings
   • Box 26 – CPP/QPP pensionable earnings

    Learn more: T4 slip – Information for employers

References

Related

• ARCHIVED - Damages, settlements and similar receipts

Legislation