Bonuses paid to employees in Canada are considered taxable benefits and are subject to standard income tax rates at both the federal and provincial/territorial levels.
Federal Bonus Tax Rates
For 2024, the federal income tax brackets and rates are as follows:
- 15% on taxable income up to $55,867
- 20.5% on taxable income between $55,867 and $111,733
- 26% on taxable income between $111,733 and $173,205
- 29% on taxable income between $173,205 and $246,752
- 33% on taxable income over $246,752
These tax brackets have been indexed to inflation for 2024 using a factor of 4.7% compared to 2023. Any bonuses will be taxed at the employee's applicable federal marginal tax rate based on their total taxable income for the year including the bonus amount.
There are two main methods for federal bonus tax withholding:
Percentage Method: A flat 22% tax rate can be applied if the bonus is paid separately from regular wages. This generally results in less tax withheld upfront but may result in owing extra at tax time if 22% proves too low based on the employee's marginal rate.
Aggregate Method: If the bonus is paid in the same paycheck as regular earnings, the employer calculates federal tax withholding using the employee's normal federal tax rate. This avoids under-withholding issues but deducts more upfront.
Provincial/Territorial Bonus Tax Rates
In addition to federal tax, bonuses are subject to provincial/territorial income tax which varies by jurisdiction. The 2024 indexed tax bracket thresholds for Ontario are:
- 5.05% on taxable income up to $46,227
- 9.15% on taxable income between $46,227 and $92,454
- 11.16% on taxable income between $92,454 and $157,509
- 12.16% on taxable income between $157,509 and $226,665
- 13.16% on taxable income over $226,665
All other provinces and territories have their own tax brackets and rates that apply.
When calculating bonus withholding, the employer can use the federal percentage method and provincial aggregate method if the bonus is paid separately. This allows minimizing federal tax while reconciling higher provincial rates.
Key Aspects and Calculations
There are some key aspects that affect how bonus payments are taxed in Canada:
CPP/QPP and EI Deductions
Bonuses are subject to standard Canada/Quebec Pension Plan (CPP/QPP) and Employment Insurance (EI) premium deductions up to the annually indexed maximum amounts. For 2024, this is:
- $4,045.50 maximum CPP contribution
- $988.80 maximum EI premium
Once an employee hits the maximum annual amounts from their regular wages earlier in the year, no further CPP/QPP or EI is deducted from bonuses.
Tax Calculation Method
As noted earlier, there are two main methods to calculate income tax on bonuses:
- Percentage method: Withhold a flat 22% (federal) and applicable provincial rate on the bonus paid separately from regular wages
- Aggregate method: Calculate federal and provincial tax withholding on the bonus combined with regular earnings for the pay period using marginal tax rates
The percentage method usually results in less tax withheld upfront but may result in an end-of-year tax bill if too little is withheld. The aggregate method avoids under-withholding issues but takes more tax off the bonus upfront.
Employers can run bonus amounts through the CRA Payroll Deductions Online Calculator to determine appropriate withholding amounts. Employees can also use tax calculators to estimate their bonus tax bill.
RRSP Contribution
An option to reduce bonus tax is contributing to an RRSP account. When an employer withholds tax and remits an employee's net bonus directly into their RRSP account, no income tax applies since RRSP contributions are tax deductible. Only the standard CPP/QPP and EI deductions apply to the gross bonus amount. This avoids bonus tax entirely while allowing the full net amount to go into the RRSP.
Tax Brackets and Marginal Rates
Bonuses are taxed at the employee's applicable marginal tax rate for the year based on their total taxable income including regular wages. As a result, a large bonus can push part of an employee's income into a higher federal and/or provincial/territorial tax bracket.
For example, based on the 2024 Ontario tax rates, a $75,000 annual salary falls into the 9.15% bracket. But a $15,000 bonus would push total taxable income to $90,000, meaning the bonus is taxed at the higher 11.16% rate.
Understanding marginal tax rates helps employees determine the tax implications of a bonus amount in their specific situation.
Changes from 2023 to 2024
Here are some of the key changes affecting taxation of bonuses from 2023 to 2024:
Indexation of Tax Brackets
As previously mentioned, the inflation adjustment factor has indexed all federal, provincial, and territorial tax brackets upward for 2024. Federally, this is 4.7%, and by varying amounts provincially.
Higher thresholds mean more income can be earned in 2024 before crossing into the next tax bracket. This helps offset the impact of inflation on purchasing power.
Increase in CPP Contribution Rates
The maximum Canada Pension Plan contribution rate has increased in 2024 to account for the enhancement of CPP retirement benefits over the coming years.
For 2024, the new annual maximum CPP contribution is $4,045.50, up from $3,867.50 in 2023. This means larger deductions from bonuses but better CPP benefits upon retirement.
Higher EI Premiums
Employment insurance premiums are also rising in 2024 to a maximum annual premium of $988.80 up from $943.94 in 2023. This results in slightly higher EI deductions from bonuses.
No More Flat-Rate Deductions for Remote Work
A temporary flat-rate deduction method for remote workers has expired as of tax year 2023. There are now stricter requirements for those deducting home office expenses related to remote work/telecommuting. This could increase taxable income for remote workers receiving bonuses.
Conclusion
While indexed tax brackets provide some offset, employees receiving bonuses in 2024 will see slightly higher deductions for CPP, EI, and potentially income tax if no longer eligible for the remote work deduction. Proper tax planning and withholding approaches can help minimize the impacts.