The bonus becomes part of your total salary for the year. Let’s say your salary is $ 36,000, and your employer gives you a $ 500 bonus. You must now be taxed as if you were earning $ 36,500. Bonus calculations need to be changed to increase annual income.
Labor insurance (EI) is an equal percentage of earnings up to an annual maximum.
The Canadian Retirement Plan (CPP) equates to a percentage of earnings in excess of $ 3,500 up to an annual maximum. The first $ 3,500 of earnings are not intended for retirement. This exempt amount is spread over all payments for the year. So with a salary of $ 36,000, your weekly gross would be $ 36,000 ÷ 52 = $ 692.31. Your weekly earnings without retirement would be $ 3,500 ÷ 52 = $ 67.31. You pay CPP for only $ 692.31 – $ 67.31 = $ 625.00.
However, if you get a $ 500 bonus on a separate check, you have to pay the CPP of the entire bonus because you already had the exempt amount on your paycheck. This can make CPP seem more expensive.
The tax works in a similar way. In Canada, the first part of our income is tax-free: the basic personal exemption ($ 10,822 in 2012). So the increasing tax rates apply to different parts of our income. Here are the prices for 2012.
The weekly payment tax amount is a mixed rate: 0% on the first slice, 15% on the next, etc. However, a lump sum, such as a bonus, must be taxed at the marginal rate: the tax rate that applies to the next dollar of earnings. This may sound very expensive, but it’s actually fair.
The bonus is taxed as regular employment income based on graded tax rates in the year of admission. The bonus will be shown on the T4 voucher. The bonus is subject to payroll deductions for income tax and government benefit programs such as the Canadian Pension Plan (CPP) / Quebec Pension Plan (QPP) and Employee Insurance (EI).
Contributions: The amount of the deduction is usually determined by your average tax rate and the contributions required for the various government benefit programs in place in your province/territory.
Some employers will allow you to postpone receiving the bonus until the next fiscal year. If you don’t need the money right now, it may be useful to postpone the bonus to the end of the year to the following year if you plan to be in the lower tax bracket the following year.
Bonuses cannot be postponed indefinitely due to salary deferral.
Agreement Rules (SDA) in the Income Tax Act. The rules of the SDA are complicated, but essentially they were introduced to prevent you from deferring your income and taxing your bonus or other taxable benefits by having your employer defer your earnings earned in the current year to the next year. If the SDA rules are activated, you will have to pay the compensation tax in the current year, even if you receive the allowance in the following year.
Your employer can help pay the bonus directly to your registered retirement savings fund (RRSP) or RRSP spouse without withholding tax if you have an RRSP room. However, this option is at the discretion of your employer and is only allowed if your employer has reasonable grounds to believe that you can deduct the RRSP contribution for that year. Your
Your employer may ask you to inspect a copy of your appraisal report showing that you have adequate unused space for RRSP deductions, or you may ask you to complete a Canada Revenue Agency (CRA) form T1213 to make sure it has reasonable reasons to believe to be able to deduct the contribution of the RRSP.
A company can grant the bonus and receive a deduction for the current tax year, even if the bonus is not paid immediately.
The company has up to 179 days after the end of the fiscal year to pay the bonus if it wants to request a deduction in the year in which the bonus was declared. A qualified tax advisor can help you determine your company’s bonus eligibility.
It is important that the company deducts the taxes from the bonus payment and pays the relevant CRA amounts promptly. A qualified tax advisor can help you determine the amounts to deduct from an employee’s pay.
To solve it yourself, you can use the CRA online payroll calculator.