How Severance Affects Long-Term Disability Benefits in Canada

If you’re on long-term disability (LTD) and your employer lets you go, one of the most confusing questions is how severance pay interacts with your disability benefits. Many Canadians don’t realize that LTD insurers often try to deduct — or completely offset — severance packages.

The truth is:

👉 Yes, severance can reduce your LTD benefits
👉 But with the right legal strategy, you can often avoid or limit these deductions

This guide explains how offsets work, what insurers are allowed to do, and how to structure a severance package so you keep more of your money.

Why Does Severance Impact LTD Benefits?

Most LTD insurance policies include an “other income” provision.
This allows the insurer to deduct certain types of income you receive while on disability, including:

• severance pay
• salary continuation
• termination pay
• income from another job
• employment-related settlements

To the insurer, severance is considered “income replacement.” But employment law treats severance very differently — and that difference is what allows you to protect your LTD payments.

What Types of Severance Can Be Deducted?

Insurers generally try to offset:

1. Salary Continuation

Often deducted dollar for dollar.

2. Lump-Sum Severance

Some insurers deduct the entire amount upfront.

3. Termination Pay/Statutory Pay

Depends on policy wording.

However — and this is critical — not all severance payments can be deducted.
With the right structure, you can legally categorize compensation in ways the insurer can’t touch.

How to Reduce or Prevent LTD Offsets

This is where an employment + LTD lawyer makes the biggest financial difference.

1. Allocate Settlement Amounts to Non-Offsettable Damages

Insurers can’t deduct:

• general damages (pain and suffering)
• human rights damages
• bad-faith or punitive damages
• amounts related to the employer’s misconduct

Reallocating some of your severance into these categories can protect your LTD income.

2. Avoid Salary Continuation Where Possible

Salary continuation is the easiest compensation for insurers to offset.
Lump sum or restructured damages often work better.

3. Time Your Severance Strategically

The start and end dates of severance can create or eliminate offset windows.

4. Challenge Incorrect Deductions

Insurers often apply offsets improperly or outside the policy wording.
These deductions are frequently reversed once challenged.

What if You’re Fired While on LTD?

If you lose your job while on disability leave, three things happen at once:

1. You may be entitled to significant severance — up to 24 months’ pay
2. Your employer may have violated human rights laws
3. Your severance may risk being offset by the LTD insurer

This is why you should never sign a severance package before speaking to an employment lawyer with experience in both employment and LTD law.

A poorly structured severance deal can cost you tens of thousands of dollars in LTD benefits.

A properly structured deal can often maximize both.

What If You Become Disabled After Being Let Go?

Insurers may argue:

• you weren’t actively working,
• your coverage ended, or
• your disability arose too late.

But your severance period can extend your “coverage window.”
If you become disabled during that period, you may still qualify for LTD — and offsets may not apply.

Eligibility depends on:

• the specific LTD policy
• whether your employer extended benefits
• when symptoms first appeared

It’s worth having these details reviewed before assuming you’re not covered.

Examples of How Severance and LTD Interact

Example 1: Avoiding a Full Offset

Employee receives $30,000 severance.
Insurer attempts to deduct the full amount.
Settlement is restructured to allocate a significant portion to human rights damages → insurer can’t offset it.

Example 2: Salary Continuation vs Lump Sum

Employee accepts 6 months of salary continuation.
Insurer offsets every dollar.
Had the employee negotiated a lump-sum settlement with allocated damages, much of the income could have been protected.

Example 3: Termination During LTD Leave

Employee is let go without accommodation.
Human rights damages increase the overall value of the claim and reduce the offset risk.

Common Questions About Severance and LTD

Does severance always reduce LTD benefits?

No. It depends on wording, structure, and timing.

Can insurers deduct EI?

Sometimes EI sickness benefits may be offset — but not all income is deductible.

Will CPP Disability affect LTD benefits?

Yes — usually directly. But CPP-D does not interact with severance.

What To Do Before Signing Any Severance Offer

Do NOT sign anything until you:

1. Review your LTD policy wording
2. Understand your right to full severance
3. Calculate potential offsets
4. Ensure your settlement is structured properly

Once a severance agreement is signed, it can be difficult — or impossible — to fix offset problems.

Speak to a Lawyer Before Accepting Severance While on LTD

Protecting your LTD benefits and maximizing your severance requires coordinated legal strategy.

The employment lawyers and LTD lawyers at Samfiru Tumarkin LLP can help you:

• avoid LTD offsets
• secure the full severance you’re owed
• challenge incorrect insurer deductions
• pursue human rights damages if applicable

Our firm has helped over 50,000 Canadians secure the compensation they’re owed, and has earned more than 3,000 five-star reviews across the country.