Understanding the Role of RRSP in Employment Law Settlement and Estate Planning
- Anna Duke & Tony Wong
- Mar 30
- 9 min read
Estate planning is an essential yet often overlooked part of financial wellness for employees. Many people associate estate planning with wealthy individuals or retirees, but the truth is, anyone with assets — including workplace benefits — needs a plan.
RRSP in Canada acts not only as an effective retiring planning strategy. It is also an important vehicle to reduce, if not eliminate, statutory deductions in employment law settlements. RRSP turns into RRIF when an employee retires.
From retirement savings to life insurance and stock options, employees often accumulate valuable financial benefits that can significantly impact their loved ones after they’re gone. Without proper planning, these assets may not reach the intended beneficiaries or could face unnecessary taxes and legal complications.
This guide explores the role RRSP plays in an employment law settlement and why estate planning matters for employees, how provincial and federal statutes governs workplace benefits, and practical steps to ensure benefits are passed on smoothly. Let’s dive into the key components employees should consider to protect their families and financial legacies.
Why Estate Planning Matters for Employees
Estate planning isn’t just for the wealthy — it’s for anyone who wants to ensure their loved ones are taken care of after they’re gone. For employees, estate planning extends beyond personal assets like homes and bank accounts. Workplace benefits — from retirement plans to life insurance — are a significant part of their financial legacy. Considering these benefits as part of an overall estate plan ensures they’re passed on smoothly to intended beneficiaries, avoiding unnecessary legal complications or delays.
2. Statutory Regulations of Retirement Benefits
Retirement benefits are heavily regulated. Laws like the Employee Retirement Income Security Act (ERISA) in the US set standards for how benefits like retirement plans and employer-sponsored life insurance must be managed.
In Canada, post-retirement benefits are regulated by both the federal and provincial/territorial governments, with the federal government administering the Canada Pension Plan (CPP) and the Old Age Security (OAS), while provinces and territories manage their own pension plans and related benefits.
In Canada, Registered Retirement Savings Plans (RRSPs) are regulated by the Canada Revenue Agency (CRA), which ensures compliance with the Income Tax Act and sets rules for contributions, investments, and withdrawals.
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Employers have a legal obligation to ensure payouts go to the designated beneficiaries on file. This framework protects employees and their families, ensuring that benefits are honored according to the employee’s documented wishes.
3. RRSP, RRIF, Severance Pay and Employment Law Settlement
What is RRSP / RRIF
A registered retirement savings plan (RRSP) is an agreement between an individual and an issuer (an insurance company, a trust firm, or a bank) that provides retirement income at maturity. Individuals make contributions, which are deductible under the income tax act. Earnings in the plan are tax-free, but withdrawals from an RRSP are taxed upon receipt.
The amount of new RRSP contribution room you get each year is equal to 18% of your earned income (meaning money that you work for, not investment income or government benefits you receive), up to a cap (called the allowable limit) that changes annually.
A registered retirement income fund (RRIF) is an agreement between an individual and a carrier (an insurance company, a trust firm, or a bank) in which the individual receives a minimum amount of money each year. The minimal sum must be paid to the individual in the year after the RRIF's inception. Earnings in an RRIF are tax-free, whereas withdrawals are taxed upon receipt.
You cannot make contributions to a Registered Retirement Income Fund (RRIF) after it's been set up; it's designed to be a retirement income source, not a savings vehicle.
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Understanding RRSP Contribution Limit: A Beginner’s Guide by TurboTax Caanda
How Registered Retirement Income Funds (RRIF) Work by Ontario Securities Commission
What is Severance Pay
According to the Government of Canada, Severance pay is money paid to you by your employer when you lose your employment through no fault of your own. CRA makes no distinction between severance pay and retiring allowance. According to CRA severance pay is the amount you would not have received but for the termination of the employment.
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What is Statutory Deductions
For retiring allowances, statutory deductions primarily involve income tax, with specific withholding rates depending on the payment amount, and no CPP or EI deductions are required.
When a Canadian employer pays a retiring allowance, they must deduct income tax, but not CPP or EI deductions, from the amount paid directly to the employee, using a specific withholding tax rate based on the amount of the payment.
Withholding Tax Rates:
10% on amounts up to $5,000.
20% on amounts over $5,000 up to and including $15,000.
30% on amounts over $15,000.
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How to Avoid or Eliminate Statutory Deductions in Your Employment Law Settlement?
There are a couple of ways you can eliminate or at least reduce the statutory deductions in your employment law settlement aka retiring allowance aka severance pay.
a. General Damage
General damages, also known as non-pecuniary damages, are not taxable in Canada due to a combination of court decisions and the interpretation of the Income Tax Act by the Canada Revenue Agency (CRA).
In the employment law context, a human rights tribunal awards an individual an amount for general damages; the amount is normally not required to be included in income. When a loss of employment involves a human rights violation and is settled out of court, a reasonable amount in respect of general damages can be excluded from income.
However, if the CRA decides to audit the settlement arrangement and finds it not bona fide, there may be taxes payable on the received payments. When entering into a settlement agreement, an employer commonly asks to be indemnified by the employees for tax-related issues.
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b. Legal Fees
Settlement portion designated as legal fee is not subject to at source statutory deduction on employer's end obviously.
c. RRSP Direct Contribution
Settlement portion designated as RRSP direct contribution and is transferred directly from employer to the RRSP account as retiring allowance contribution is not subject to at source statutory deduction on employer's end.
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Click here to contact HTW Law - Employment Lawyer for assistance and legal consultation.
4. Common Employee Benefits That Transfer After Death
Employees often overlook how many workplace benefits can transfer to loved ones after they pass away. These include:
Retirement accounts (401(k), pensions, IRAs for USA; RRSP, RRIF for Canada): Beneficiaries can typically claim these accounts through a streamlined process, avoiding probate. Canadian employees may hold Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs), which can transfer to a spouse or other beneficiaries, often with tax deferral benefits.
Life insurance payouts: Employer-sponsored policies often provide a base level of coverage, with options for additional voluntary coverage. Private policies outside of work may complement these benefits.
Life insurance payouts Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs): In US, any remaining HSA funds can pass to a designated beneficiary, while FSAs typically do not carry over. Canadian employees may have Tax-Free Savings Accounts (TFSAs), which can transfer tax-free to a spouse or designated successor.
In Canada, Health Spending Accounts (HSAs), also known as Health Care Spending Accounts (HCAs), are tax-advantaged accounts where employers can allocate funds for employees to reimburse health and dental expenses, with the funds being tax-free to the employee.
In Canada, the concept of a Flexible Spending Account (FSA) is similar to a Health Spending Account (HSA), allowing tax-advantaged spending on eligible health expenses, but the term "FSA" is not used, and they are often referred to as Health Care Spending Accounts (HCSA).
Articles of Interest:
Health Spending Accounts For Canadians Explained by Simply Benefits Marketing
Health Care Spending Account (HCSA) vs Health Spending Account (HSA) by EasyHSA benefits
Stock options and equity grants: The treatment of unvested shares varies by employer plan. Some plans allow immediate vesting upon death, while others may expire.
Unpaid wages, bonuses, and accrued PTO: Employers are generally required to pay out final wages and unused vacation or PTO to the employee’s estate or named beneficiary.
5. Designating and Updating Beneficiaries
Choosing the right beneficiaries is a key step in estate planning. Employees should regularly review and update these forms, especially after major life events like marriage, divorce, or having children. An outdated form could unintentionally leave benefits to an ex-spouse or exclude new family members.
It’s important to note that beneficiary designations typically override wills — meaning the person listed on the employer’s form gets the payout, even if the will says otherwise. Keeping these documents aligned avoids potential legal disputes among family members.
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6. Estate Planning Tools for Employees
To complement their workplace benefits, employees should consider the following estate planning tools:
Wills and trusts: While a will covers personal assets, a trust may be helpful for more complex situations, like minor children or blended families.
Powers of attorney: This allows a trusted person to manage finances if the employee becomes incapacitated.
Digital asset planning: Employees should think about what happens to professional accounts or online business profiles in the event of their death or incapacity.
Consulting an estate planning lawyer can help employees structure these tools effectively to ensure their intentions are legally sound and tax-efficient.
7. Employer Responsibilities and Legal Considerations
Employers must fulfill certain legal responsibilities when an employee passes away, including:
Providing benefit information to survivors: Timely communication helps families access payouts and other benefits.
Explaining tax implications: Different benefits have varying tax treatments — for example, RRSPs and RRIFs are typically fully taxable to beneficiaries in Canada unless rolled over to a spouse or financially dependent child.
Health coverage continuation: Under U.S. COBRA rules, families may continue employer-sponsored health plans for a period of time after the employee’s death. In Canada, similar continuation options may apply through private or group health plans.
8. Pitfalls to Avoid and Proactive Steps
Common mistakes employees should avoid include:
Forgetting to update beneficiaries: Especially after major life changes.
Assuming a will controls everything: Beneficiary designations usually take precedence.
Overlooking workplace benefits in estate planning: Employees should treat these benefits as essential assets.
Human Resources (HR) departments can guide employees by providing general information, though legal advice should come from a qualified professional. Employees may also benefit from consulting financial advisors or estate attorneys to ensure they’re making the best decisions for their families.
9. Conclusion: Planning Now to Protect Loved Ones
In employment law settlements, RRSPs (Registered Retirement Savings Plans) can play a role in structuring payments to defer taxes, with lump-sum severance payments potentially being transferred directly into an RRSP, allowing the employee to pay tax later when withdrawing from the RRSP.
Estate planning is not a luxury reserved for the wealthy; it is a fundamental component of financial wellness for all employees. The accumulation of workplace benefits, ranging from RRSPs to stock options, creates a responsibility to ensure these assets are managed and distributed according to individual wishes.
Estate planning isn’t just about wealth — it’s about ensuring peace of mind for both the employee and their loved ones. By integrating workplace benefits into a broader estate plan, employees can protect their financial legacy and avoid unnecessary hardship for those they leave behind. Regularly reviewing beneficiary designations, understanding employer-sponsored benefits, and seeking professional guidance can make all the difference.
Employees should take time to review their accounts today — because planning now is the best way to protect their loved ones in the future.
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If you’ve been a victim of workplace harassment and discrimination, wrongful dismissal or constructive dismissal don't wait or there might be serious health implications to your mental and physical health.
You may want to consult with an experienced employment law firm, such as HTW Law, to learn about your employment law rights and your legal options.
With the right legal support, employees can navigate the challenges of unfair practices and work towards a more equitable and respectful work environment.
You don't have to fight the battle alone. Speaking with an employment lawyer who is familiar with the laws and regulations regarding workplace harassment and disability discrimination, and constructive dismissal will go a long way. If you are in doubt, it's essential that you reach out for help as soon as possible right away.
Click here to contact HTW Law - Employment Lawyer for assistance and legal consultation.
Author Bio:
Anna Duke is an exceptional freelance content writer and blogger, well-known for her expertise on a variety of topics such as Health, Travel, Home improvement and more. To know more about her visit her personal site askpreeto.com.
Tony Wong - Staff Writer at HTW Law
