When you pay an employee an amount in lieu of termination notice under the terms of an employment contract or federal, provincial or territorial employment labour standards, the amount is considered employment income, whether or not it is paid on termination of the employment.

Deduct Canada Pension Plan (CPP) contributions, employment insurance (EI) premiums, and income tax. To determine the amounts to deduct, include the wages in lieu of termination notice with the regular income, if any, for the pay period.

Use the bonus method to determine the amount of tax to deduct from the wages in lieu of termination notice.

For more information, see archived Interpretation Bulletin IT-365R2, Damages, Settlements and Similar Receipts.

Forms and publications

• Guide T4032, Payroll Deductions Tables
• Archived Interpretation Bulletin IT-365R2, Damages, Settlements and Similar Receipts