Tax tips if you’ve been laid off or furloughed

Companies facing financial challenges, slow business periods or restructuring sometimes furlough workers, which means they're still employed but temporarily on leave without pay.

“A layoff is the opposite,” Ms. Ricchio says. “It means your employment is permanently ended.”

For tax purposes, if you're furloughed and receive compensation, you need to report this as income on your tax return, filing as normal, she notes. However, when you're laid off, your employer may provide a final paycheque that includes unpaid wages, vacation pay and possibly a severance package. All these amounts are taxable and will be reported on your T4 slip at the end of the tax year.

You may decide to claim Employment Insurance (EI) if you're laid off. This is taxable income reported on a T4E, which affects your taxes like any other type of income. When you file your tax return, depending on your net income for the year, you may need to repay some of your EI benefits; this is called an EI clawback.

Ms. Ricchio says that tax credits available depend on various factors and your eligibility. The Canada Workers Benefit (CWB) is a refundable tax credit designed to support low-income individuals and families. If you've been furloughed, you may qualify for that, depending on your income for the year. You can apply for the CWB when you file your tax return and the CRA will assess your eligibility when processing your return.

Ms. Ricchio points out that some provinces and territories offer benefits and credits to help low-income individuals.

“Be sure to check what's available in your region,” she advises.

If you've been let go and are looking for work, most expenses such as travel for interviews and meals with potential employers are not deductible, she says. However, you may be able to claim costs such as relocation expenses if you move more than 40 kilometres for a new job.

“Keep detailed records of any job-related expenses and consult the CRA guidelines to see if you qualify for deductions,” she says.

If you contest a layoff, you can't deduct the legal fees you paid. However, if you pay legal fees to fight for unpaid wages, salary or other employment income owed by your employer, those fees can be deducted.

“You don't have to win the case or collect the money-you just need to have made a legitimate attempt to claim what you believe you're owed,” Ms. Ricchio says, although the fees must clearly be tied to your salary or wages. “And if you receive a settlement or are reimbursed for your legal costs, you'll need to subtract that amount from your claim.”

A severance payment can mean a big tax bill, especially if it comes late in the year. One way to reduce its impact is to put the money into tax-advantaged accounts such as a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA). An RRSP helps you save for retirement while lowering your taxable income. Contributions are tax-deductible, and your savings grow tax-free until you withdraw from that account. On the other hand, TFSAs, unlike an RRSP, don't offer a tax deduction for contributing, but withdrawals are completely tax-free. Ms. Ricchio says it's important to avoid going over your RRSP and TFSA contribution limits to avoid tax penalties.

If you're laid off and have a pension plan, your two main options are to buy a life annuity or transfer the value. Ms. Ricchio explains that choosing the annuity means you'll get a fixed, guaranteed payment (usually monthly) for the rest of your life. Transferring the value lets you move the accumulated pension funds into a locked-in RRSP or locked-in registered account (LIRA).

Ms. Ricchio suggests workers maintain an emergency fund to help cover expenses in case of a furlough or job loss.

“And when tax season arrives, ensure that all income sources - EI benefits, severance payments and any other income - are reported accurately, including the relevant tax slips,” she says.

She says workers may also want to consider pursuing further education or training while unemployed and may be eligible for tax credits such as the Canada training credit or a tuition tax credit.

“Being laid off is never easy, but understanding your tax situation can help you be prepared,” Ms. Ricchio says. During this tough period, Canadians can take control of their taxes by filing their own tax return with TurboTax, or use TurboTax Assist & Review to get unlimited advice and guidance from a tax expert with an average of 10 years of experience.

“You can feel confident you'll get the biggest refund possible, no matter your situation,” she says.

This article was originally published by The Globe and Mail in March 2025.