How are bonuses taxed in Canada?

If you’re fortunate enough to get a bonus from your employer this year, or if you’ve recently earned a pay bump, how should you spend it? 

Maybe that money is already spoken for. Many Canadians are struggling financially right now, so a bonus or salary increase might simply help cover the rising cost of living or create a bit of breathing room in your budget. But if you’re keeping up with monthly obligations like rent, mortgage payments, household bills and loans, you may have some flexibility in how you allocate those bonus bucks—including saving towards your financial goals.

“Year-end bonuses are very exciting and tempting,” says Reni Odetoyinbo, a financial influencer in Toronto who shares money tips on her site, Reni, The Resource. “I like to look at all my goals for the year and see if anything needs topping up to decide how I spend the bonus.” (Read her Q&A with MoneySense.)

Are work bonuses taxed?

Before you start divvying up your dollars: Know that bonuses are taxed like your other wages, so you may not receive as much as you think. Your employer will also deduct Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums, unless you’ve reached your CPP and EI maximums for the year. 

If you don’t need that bonus money right away, you could have your employer transfer it directly into your registered retirement savings plan (RRSP), if you have RRSP contribution room. The benefit of doing this: no federal or provincial taxes will be withheld (unlike your regular pay, from which taxes are taken off each paycheque), so all of the money can be put to work right away.

A note about bonuses, RRSPs and taxes

Many employees get their bonus in February, a detail that matters when it comes to filing your taxes. “Employment income—salary or bonus—is taxable when paid,” says Jason Heath, a Certified Financial Planner and MoneySense columnist. “So, a February 2025 bonus is taxable in 2025, even though it may be tied to 2024 performance by the employee or the company.” 

If you direct your bonus to an RRSP, no taxes will be withheld. If you don’t do this every year, however, that can create an unfortunate mismatch, Heath notes. “Asking your employer to deposit your bonus directly to your RRSP can result in your full pre-tax bonus being invested right away. But watch out. If you do this in the first 60 days of the year, you get to claim the deduction on your previous year’s tax return. But the bonus is taxable in the year that it is received. Unless you do this every year, you could end up with a tax refund one year, but a balance owing the next year.”

“Of course, the RRSP money is likely going to be stored away for a longer term, so if you have some more immediate needs, these are important to consider,” says Odetoyinbo. On that note, if you don’t direct your pre-tax bonus to an RRSP, here are five ways to use the money, plus links to tips and resources for each one.

1. Pay off credit card bills and other high-interest debts

If you have high-interest debt on credit cards or a line of credit, paying it down with a lump sum could save you hundreds of dollars in interest payments, notes Odetoyinbo. “A payment to your 19.99% credit card debt is one of the best returns you can get.”

If you’re carrying a balance on one or more cards, use proven strategies to pay it down, such as switching to a low-interest credit card or balance transfer credit card—both can help slow the accumulation of interest. You could also explore consolidating your debt into a single payment plan. 

How does your debt compare?

Canadians’ average credit card balance in the third quarter of 2024 was $4,562, according to TransUnion, one of Canada’s two credit bureaus. That’s 6.97% higher than the same period in 2023.

2. Pay down your student debt

Do you still have student debt hanging over your head? If you aren’t carrying any debts that charge higher interest (like credit card debt), consider putting your bonus toward your student loan. For the 2022–2023 academic year, the average Canada Student Loan balance at the time of leaving school was $15,091, according to Employment and Social Development Canada. It also notes that borrowers typically repay the money over nine and a half years—imagine slashing that by a year or two. 

Read: Tips for paying down a student loan faster
Read: How to decide between investing and paying off student debt
Read: Is debt consolidation a good option for student loans?
Read: The MoneySense Student Money Guide

3. Add to your emergency fund

An emergency fund is a financial cushion you can use when faced with a sudden problem, like a job loss, car breakdown, home repair or root canal—basically, anything that life throws at you unexpectedly. 

Experts usually recommend saving enough money for three to six months of living expenses, but anything is better than nothing. If you can put $20 a week into a no-fee online bank account—such as those offered by Tangerine, Simplii Financial, PC Financial and EQ Bank—you’ll have over $1,000 after one year, potentially earning interest. 

Learn more about building an emergency fund and preparing for financial challenges.

Featured accounts

Why trust us

MoneySense is an award-winning magazine, helping Canadians navigate money matters since 1999. Our editorial team of trained journalists works closely with leading personal finance experts in Canada. To help you find the best financial products, we compare the offerings from over 12 major institutions, including banks, credit unions and card issuers. Learn more about our advertising and trusted partners.

4. Save for retirement or another financial goal

It’s never too early to start socking away money for retirement—the earlier you do, the more you could benefit from the power of compound growth. (See for yourself with our compound interest calculator.) 

If you save or invest within a registered account such as an RRSP or a tax-free savings account (TFSA), your money also grows tax-sheltered—and in the case of a TFSA, you’ll never pay tax on it. 

If you’re planning to buy a home, consider opening a first home savings account (FHSA). Introduced in 2023, these accounts create up to $40,000 in tax-free savings room for first-time home buyers ($80,000 for couples). Some FHSAs offer interest on your cash savings, plus a promotional rate when you first open the account. 

For more tips, read our guide for first-time home buyers.

Rankings

Compare the best FHSA rates in Canada

see rates

5. Create a sinking fund for an experience or purchase

Do you have some bonus cash left after considering the ideas above? “Next, consider exciting things like trips you may want to go on, items you may want to purchase, activities you may want to do,” says Odetoyinbo. “This money can start a sinking fund towards one of these activities.”

A sinking fund is money set aside for a specific purpose. It could even be a separate savings account that you name, say, Japan Trip, Wedding or Concert Tickets. And, to help your money grow while you save, you can open a high-interest savings account. Preferably one with no fees. 

“As with anything in personal finance, what you do with your bonus is personal,” says Odetoyinbo. “You’ve worked hard all year, so use this for something that you value and that will benefit you long-term in the way that you need it.”

Newsletter

Get free MoneySense financial tips, news & advice in your inbox.

subscribe now

Read more about budgeting:

• Travel hacks to help you save money on your next trip
• MoneySense’s free Excel template for your monthly budget
• The best way to save for retirement in your 20s
• How Canadians can save money on gas, grocery, cellphone and other home bills

The post How are bonuses taxed in Canada? appeared first on MoneySense.

Source
Author : Jaclyn Law