Got a year-end work bonus, congrats! Having extra money may sound great, but you will still have to pay taxes on this amount as you do on all other income. Before you plan to spend it, know what deductions to expect—and how to avoid unexpected balances at tax time once you file your taxes.
In Canada, bonuses are considered part of an employee’s income and are therefore subject to taxation.
How Bonuses are Taxed in Canada?
Supplemental income is usually money earned outside your regular paycheck.
Bonus pay is considered supplemental income because it isn’t part of your regular wages, according to the CRA. In Canada, bonuses are considered a taxable benefit and therefore are considered taxable income. The taxes on bonuses are the same as if they were included in your basic salary.
The tax rates, however, will vary depending on your Province or Territory. With the addition of the bonus to your salary, part of your income may be taxed in the next tax bracket.
Bonuses are subject to income tax withholding at the time they are paid. The amount of tax withheld can depend on several factors:
- If the bonus is paid along with regular pay: The bonus is added to the employee’s regular pay, and the total amount is taxed according to the employee’s tax bracket.
- If the bonus is paid separately: The Canada Revenue Agency (CRA) provides guidelines for employers on how to withhold tax on lump-sum payments like bonuses.
Also, just like your salary, your bonus will include deductions like the Canada Pension Plan (CPP) and Employment Insurance (EI). (The only exception is if you’ve already made the maximum contributions for the year.)
How to Calculate Taxes on Bonus Payouts in Canada?
To understand how bonus taxes are calculated, let’s use an example.
For this example:
- You live in Ontario, Canada
- Your base salary is $90,000
- You are receiving a one-time bonus of $10,000.
- You want to know how much tax will be on the $10,000 bonus amount
Here’s how we could calculate the tax on a bonus in Ontario:
Step 1 – Calculate taxes on base salary
In our example, the base salary is $90,000. First, calculate what would you owe for your regular salary. For 2024, you will owe an estimated $ $18,421 in taxes. (That’s $ $12,312 in federal tax + $ $6,109 in provincial tax.)
Step 2 – Calculate taxes on the base salary + bonus
In our example, we received a $10,000 bonus; add this to the $90,000 salary for a total of $100,000. The estimated tax owed on this amount is $21,590. (That’s $ $14,362 in federal tax + $ $7,228 in provincial tax.)
Step 3 – Subtract the difference between the combined taxes
Next, subtract the total Federal + Provincial tax amounts in Step 1 from Step 2.
(Step 2 Federal + Provincial Tax) – (Step 1 Federal + Provincial Tax) = Estimated taxes to be paid on your bonus.
In our example: $21,590 – $18,421 = $3,169
We can expect to pay an estimated $3,169 on the bonus of $10,000. The $15,448 of taxes may have already been deducted from our paycheque, so we don’t consider this for the taxed amount on the bonus.
This two-step calculation, one with and one without the bonus is called the Bonus Method.
There are other CRA tax methods the lump-sum and TD1X methods and the periodic method, this is the one closest to the bonus method itself.
The periodic method determines the federal and provincial or territorial tax deductions on total salary, wages, taxable benefits, pension income, commissions, and other periodic payments. The periodic method is the default when no other method applies and is used for earnings paid on a regular pay period basis.
The bonus method uses the periodic method, only it calculates the tax twice – once with the bonus and once without the bonus.
There are two things that the bonus and periodic methods share in common.
First, they share the same overall logical structure:
- The earnings or deductions concerned are converted to annual taxable income.
- The annual tax owing on this income is calculated.
- This annual tax is converted to the amount owing for the pay period.
Second, the bonus and periodic methods, with minor differences, share the same logic for calculating annual tax, once annual taxable income has been determined.
**The minor difference applies to the calculation of personal income credits for CPP and EI source deduction amounts, but we won’t go into that level of detail here.**
How to Report a Bonus on Your Tax Return in Canada
1. Obtain Your T4 Slip
Your employer should provide you with a T4 slip (Statement of Remuneration Paid) by the end of February following the tax year in which you received the bonus. The T4 slip will include all employment income, including any bonuses, and the taxes withheld.
2. Identify the Bonus Amount
The bonus amount is typically included in Box 14 (Employment Income) on your T4 slip along with your regular salary and wages. (and often in Box 40—other taxable allowances and benefits—as well).
3. Report a Bonus on Your Tax Return
On your tax return (T1 General), report your total employment income as shown in Box 14 of your T4 slip on Line 10100 (Employment Income).
4. Report Taxes Paid
Enter the total federal and provincial/territorial income tax deducted as shown on your T4 slip on Lines 43700 (Total Income Tax Deducted) and 42800 (Provincial or Territorial Tax).
Example
Assume you received a T4 slip with the following details:
- Box 14 (Employment Income): $55,000 (including a $5,000 bonus)
- Box 22 (Income Tax Deducted): $8,000
- Box 16 (CPP Contributions): $2,750
- Box 18 (EI Premiums): $889
Here’s how you would enter this on your tax return:
- Line 10100 (Employment Income): $55,000
- Line 43700 (Total Income Tax Deducted): $8,000
- Line 30800 (CPP Contributions): $2,750
- Line 31200 (EI Premiums): $889
Using Your Bonus for RRSP Contributions
In Canada, contributing to a Registered Retirement Savings Plan (RRSP) can be a smart strategy to reduce the tax burden on your bonus. Bonuses and RRSP contributions work together for tax purposes.
If your employer deposits your bonus directly into an RRSP, then there’s no tax withholding. And the benefit is that you don’t have to wait for a tax refund to start investing the amount.
However, your contribution room for the year remains the same, and the bonus counts toward the year it was awarded.
Is the Tax Treatment of Bonuses Different From Salaries in Canada?
Bonuses aren’t taxed any differently than regular salary and wage amounts. Your bonus is taxed according to the same federal and provincial/territorial tax rates that the rest of your income is taxed. However, it might seem like you’re getting taxed more on that extra money because more of your earnings may end up in a higher tax bracket.
However Canada has a progressive tax system which means different income levels are taxed at different rates. Adding a bonus on top of your salary could mean that a portion of your income is bumped into a higher tax bracket. And then you end up paying a higher tax rate for that portion of income, which includes your bonus.
Federal and provincial income tax rates
To help you determine your taxes owing, here are your marginal federal and provincial/territorial tax rates!
2024 Federal Income Tax Rates
These rates apply to everyone who earns income in Canada.
- 15% on taxable income that is $55,867 or less
- 5% on taxable income from $55,867 to $111,733
- 26% on taxable income from $111,733 to $173,205
- 29% on taxable income from $173,205 to $246,752
- 33% on taxable income over $246,752
2024 Provincial Income Tax Rates
The following tax rates depend on where in Canada you live.
Alberta
- 10% on taxable income that is $148,269 or less, plus
- 12% on taxable income from $148,269 to $177,922
- 13% on taxable income from $177,922 to $237,230
- 14% on taxable income from $237,230 to $355,845
- 15% on taxable income from $355,845
British Columbia
- 06% on taxable income that is $47,937 or less
- 7% on taxable income from $47,937 to $95,875
- 5% on taxable income from $95,875 to $110,076
- 29% on taxable income from $110,076 to $133,664
- 7% on taxable income from $133,664 to $181,232
- 8% on taxable income from $181,232 to $252,752
- 5% on taxable income from $252,752
Manitoba
- 8% on taxable income that is $47,000 or less
- 75% on taxable income from $47,000 to $100,000
- 4% on taxable income over $100,000
New Brunswick
- 4% on taxable income that is $49,958 or less
- 14% on taxable income from $49,958 to $99,916
- 16% on taxable income from $99,916 to $185,064
- 5% on taxable income over $185,064
Newfoundland and Labrador
- 7% on taxable income that is $43,198 or less
- 5% on taxable income from $43,198 to $86,395
- 8% on taxable income from $86,395 to $154,244
- 8% on taxable income from $154,244 to $215,943
- 8% on taxable income from $215,943 to $275,870
- 8% on taxable income from $275,870 to $551,739
- 3% on taxable income from $551,739 to $1,103,478
- 8% on taxable income from $1,103,478
Nova Scotia
- 79% on the portion of taxable income that is $29,590 or less
- 95% on taxable income from $29,590 to $59,180
- 67% on taxable income from $59,180 to $93,000
- 5% on taxable income from $93,000 to $150,000
- 21% on taxable income over $150,000
Ontario
- 05% on taxable income that is $51,446 or less,
- 15% on taxable income from $51,446 to $102,894
- 16% on taxable income from $102,894 to $150,000
- 16% on taxable income from $150,000 to $220,000
- 16% on taxable income over $220,000
Prince Edward Island
- 65% on taxable income that is $32,656 or less
- 63% on taxable income from $32,656 to $64,313
- 65% on taxable income from $64,313 to $105,000
- 00% on taxable income from $105,000 to $140,000
- 75% on taxable income over $140,000
Quebec
- 14% on taxable income that is $51,780 or less
- 19% on taxable income from $51,780 to $103,545
- 24% on taxable income from $103,545 to $126,000
- 75% on taxable income over $126,000
Saskatchewan
- 5% on taxable income that is $52,057 or less
- 5% on taxable income from $52,057 to $148,734
- 5% on taxable income from $148,734
2024 Territorial Income Tax Rates
Northwest Territories
- 9% on taxable income that is $50,597 or less
- 6% on taxable income from $50,597 to $101,198
- 2% on taxable income from $101,198 to $164,525
- 05% on taxable income over $164,525
Nunavut
- 4% on taxable income that is $53,268 or less
- 7% on taxable income from $53,268 to $106,537
- 9% on taxable income from $106,537 to $173,205
- 5% on taxable income from $173,205
Yukon
- 4% on taxable income that is $55,867 or less
- 9% on taxable income from $55,867 to $111,733,
- 9% on taxable income from $111,733 to $173,205
- 8% on taxable income from $173,205 to $500,000
- 15% on the taxable income over $500,000
Let us Help with Your Bonus Strategy
Understanding how bonuses are taxed in Canada is important for employees seeking to optimize their earnings and avoid unexpected tax obligations. By accurately reporting your bonus and following the correct procedures, you can ensure compliance with Canadian tax laws and potentially optimize your tax refund. If your tax situation is complex, consider consulting a tax professional.
Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.