Retention Bonus in Canada: What Employees Need to Know Before Accepting One

If your employer is going through layoffs, restructuring, or a sale, you may be offered a retention bonus to stay on temporarily. At first glance, it can sound like free money.

But in Canada, accepting a retention bonus can have real legal consequences — especially when it comes to severance pay, termination rights, and signing a release.

This guide explains what a retention bonus is, how it works in Canada, and what employees should understand before saying yes.

What Is a Retention Bonus?

A retention bonus is a payment an employer offers to encourage an employee to stay with the company for a specific period of time.

It is most commonly offered during:

• Mass layoffs
• Corporate restructuring
• Mergers or acquisitions
• Insolvency or wind-downs
• Executive or key employee departures

The goal is simple: keep critical staff in place long enough to transition the business.

Why Do Employers Offer Retention Bonuses?

Retention bonuses are not about rewarding loyalty — they are risk-management tools for employers.

Companies use them to:

• Maintain operations during uncertainty
• Prevent key employees from leaving early
• Protect client relationships and internal knowledge
• Ensure cooperation through a sale or shutdown

How Do Retention Bonuses Work in Canada?

There is no standard retention bonus structure. Each employer sets its own terms, which are usually outlined in a written agreement.

Common features include:

• A fixed payment (or staged payments)
• A required “stay until” date
• Conditions tied to performance or cooperation
• Repayment clauses if you leave early
• A release of legal claims (sometimes hidden in the fine print)

Is a Retention Bonus Taxable?

Yes.
In Canada, retention bonuses are typically treated as employment income, meaning:

• Income tax applies
• CPP and EI deductions may apply
• The net amount may be significantly less than expected

This matters when comparing a bonus to potential severance entitlements.

Does Accepting a Retention Bonus Affect Severance Pay?

A bonus included in severance can — and often does — impact compensation.

Depending on how the agreement is written, accepting a retention bonus may:

• Reduce future severance entitlements
• Be used to offset severance later
• Limit your ability to claim constructive dismissal
• Signal acceptance of changed employment terms

Do Retention Bonuses Require Signing a Release?

Very often, yes.

Many retention bonus agreements include language requiring you to:

• Waive legal claims
• Release the employer from future liability
• Accept the bonus as full or partial compensation

Retention Bonus vs Severance Pay: What’s the Difference?

Retention Bonus

• Paid to keep you working
• Conditional on staying
• Often temporary
• May include a release
• Fully taxable as income

Severance Pay

• Paid after employment ends
• Based on age, role, length of service
• Intended to compensate for job loss
• Can’t be replaced by a bonus without agreement
• Often far more valuable

Should You Accept a Retention Bonus?

There is no one-size-fits-all answer.

Before accepting, you should understand:

• What rights you are giving up
• Whether the bonus replaces or reduces severance
• Whether you are being asked to sign a release
• What happens if your role changes or ends early

Speak With an Employment Lawyer Before You Sign

Retention bonuses are frequently presented as “standard” or “time-sensitive.” In reality, they are negotiable — and their impact is often understated.

If you’ve been offered a retention bonus:

• Don’t assume it’s in your best interest
• Don’t rely on HR explanations alone
• Don’t sign anything without understanding the consequences