Canada vs. U.S.: Simple words can cause big problems

Recently I had a discussion with someone regarding the terms of a layoff, from a large U.S. based Multi-National Corporation. This individual was a Canadian employee, working in Canada, which placed the U.S. based corporation in a position to be bound by Canadian laws.


What was interesting was the use of terminology, which may be appropriate by U.S. Employment Standards, but do not correlate equally into Canadian legislations. The Termination Contract stated that the choice to exercise the option of Salary Continuance that would extend 8 weeks was desired by the U.S. Corporation, but when the pay stub was received by the employee, it had been coded as “severance pay” instead of salary. The individual had then contacted the employer and the response was that it is standard practice to regularly use the terms Severance and Salary Continuance to mean the same thing as they are interchangeable in the US.


However, in Canada, Severance and Salary Continuance are different and they are not interchangeable whatsoever. These are not only completely different terminologies, but they are taxed differently as well. A salary continuance, is not legislated, but can be defined as regular salary, including full company pension and benefits, paid over “x” number of weeks or months upon termination of employment. The employee-employer relationship is still deemed to exist, hence the amount of employment income is subject to CPP, EI and tax and is reported in box 14 of the T4. The ROE is not required until the end of this extended period since both hours and dollars are insurable.


A severance pay is reported on a T4A as a lump sum payment. In addition to that, a severance is not subject to CPP or EI deductions. Income tax on a severance payment is calculated on a fixed percentage as follows:


1)      0 – $5000.00 = 10%

2)      $5000.00 – $15,000.00 = 20%

3)      $15,000.00 and over = 30%


In the case of this individual, not only was the terminology incorrect between contract and payment, but the taxation as stated.


When the individual contacted the U.S. based corporation by email again to point out the errors in calculations, missing accrued vacation pay, (since vacation accrual should have been paid if this was a true severance) improper use of terminology, and various other items, the response was that the corporation was going to discuss it with the internal legal department.


These types of errors in employment and termination contracts are quite common with companies which employ individuals across borders.


By Canadian Labour Law, the contract is held as the agreement to which both parties are bound to legally. There cannot be interchanging of terminology, or exclusions because of standards that are practiced in countries outside of Canada. Situations such as these can become costly endeavours for both the employer and employee. The simplest solution would be to consult a Canadian HR/Payroll organization that specializes in labour law. Utilizing these organizations throughout the process from recruitment, employment, benefits and payroll will reduce cost and create a simple process for cross border employees.


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