The tax system in Ontario, like elsewhere in Canada, is a vital tool for raising government revenue. It operates on both provincial and federal levels and covers various income categories, including salaries, capital gains, and yes, bonuses.
In Ontario, we encounter various types of taxes, from property tax to sales tax (HST), and the one we are focused on today: income tax. Income tax is further divided, with bonuses falling under the umbrella of 'supplemental income.'
A bonus is an extra payment given to employees over and above their regular salary. Bonuses are a reward to employees for exceptional work, a future performance incentive, or a goodwill gesture.
There are different types of bonuses - year-end bonuses, performance bonuses, sign-on bonuses, and profit-sharing bonuses etc. Sometimes bonuses are a significant portion of an individual's income, hence taxation on bonuses is a concerning matter.
In Ontario, bonuses are subjected to higher taxes due to be considered as supplemental income. This rate can often come as a surprise to employees who may see a significant chunk of their bonus disappear to taxes.
The taxation rate of bonuses depends on various factors, including the bonus amount, the individual's tax bracket, and whether the bonus is lump-sum or spread out over the year.
High taxation impacts the morale of employees as their take-home bonus reduces drastically. It can also affect financial planning and savings.
From an employer's perspective, high bonus taxes can affect their compensation strategy, making it harder to incentivize and retain talent.
Supplemental wages are payments made to an employee that aren't part of their regular wages. Apart from bonuses, this category can include things like overtime pay, commissions, back pay, and even accumulated sick leave in some cases.
Supplemental wages are subject to a different taxation approach, often at a higher rate. This is why your bonus can seem to shrink significantly after tax deductions.
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 ($ 15,000 in 2023). So the increasing tax rates apply to different parts of our income. Here are the prices for 2023.
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 part of payroll deductions for income tax and government benefit programs such as the Canadian Pension Plan (CPP) and Quebec Pension Plan (QPP) and Employee Insurance (EI).
Contributions: The amount of the deduction is usually based on your average tax rate and the amount of money you have to pay into the different government benefit programs in your province or 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.
Rules (SDA) in the Income Tax Act. The rules of the SDA are complex, however their essential intention is to forestall you from delaying your income and not paying taxes to your bonus or different taxable advantages by using having your employer positioned your earnings from this year into subsequent yr. If the SDA regulations are in vicinity, you'll have to pay the reimbursement tax in the present day 12 months, even in case you get the allowance the following 12 months.
If you've got an RRSP, your business enterprise can assist pay the bonus at once into your RRSP or your spouse’s RRSP without taking tax out. But this desire is up to your employer, and they will simplest will let you do it if they have a good motive to suppose you may deduct the RRSP contribution for that yr.
Your employer may ask you to inspect a copy of your appraisal report showing that you have adequate unused space for RRSP deductions, or it may ask you to complete a Canada Revenue Agency (CRA) form T1213 to make sure it has reasonable reasons to believe you are 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 deduct the taxes from the bonus payment and pay the relevant CRA amounts promptly. A qualified tax advisor can help you determine the amounts to deduct from an employee’s pay.