Possibly that cash is already spoken for. Many Canadians are struggling financially proper now, so a bonus or wage enhance would possibly merely assist cowl the rising price of residing or create a little bit of respiration room in your funds. However in the event you’re maintaining with month-to-month obligations like lease, mortgage funds, family payments and loans, you might have some flexibility in the way you allocate these bonus bucks—together with saving in the direction of your monetary objectives.
“Yr-end bonuses are very thrilling and tempting,” says Reni Odetoyinbo, a monetary influencer in Toronto who shares cash recommendations on her web site, Reni, The Useful resource. “I like to take a look at all my objectives for the 12 months and see if something wants topping as much as determine how I spend the bonus.” (Learn her Q&A with MoneySense.)
Are work bonuses taxed?
Earlier than you begin divvying up your {dollars}: Know that bonuses are taxed like your different wages, so chances are you’ll not obtain as a lot as you suppose. Your employer will even deduct Canada Pension Plan (CPP) contributions and employment insurance coverage (EI) premiums, except you’ve reached your CPP and EI maximums for the 12 months.
Should you don’t want that bonus cash immediately, you may have your employer switch it instantly into your registered retirement financial savings plan (RRSP), you probably have RRSP contribution room. The good thing about doing this: no federal or provincial taxes can be withheld (not like your common pay, from which taxes are taken off every paycheque), so the entire cash will be put to work immediately.
A word about bonuses, RRSPs and taxes
Many staff get their bonus in February, a element that issues on the subject of submitting your taxes. “Employment earnings—wage or bonus—is taxable when paid,” says Jason Heath, a Licensed Monetary Planner and MoneySense columnist. “So, a February 2025 bonus is taxable in 2025, regardless that it might be tied to 2024 efficiency by the worker or the corporate.”
Should you direct your bonus to an RRSP, no taxes can be withheld. Should you don’t do that yearly, nevertheless, that may create an unlucky mismatch, Heath notes. “Asking your employer to deposit your bonus on to your RRSP may end up in your full pre-tax bonus being invested immediately. However be careful. Should you do that within the first 60 days of the 12 months, you get to assert the deduction in your earlier 12 months’s tax return. However the bonus is taxable within the 12 months that it’s acquired. Except you do that yearly, you may find yourself with a tax refund one 12 months, however a stability owing the following 12 months.”
“After all, the RRSP cash is probably going going to be saved away for a long term, so you probably have some extra fast wants, these are essential to think about,” says Odetoyinbo. On that word, in the event you don’t direct your pre-tax bonus to an RRSP, listed below are 5 methods to make use of the cash, plus hyperlinks to ideas and assets for each.
1. Repay bank card payments and different high-interest money owed
When you have high-interest debt on bank cards or a line of credit score, paying it down with a lump sum might prevent lots of of {dollars} in curiosity funds, notes Odetoyinbo. “A fee to your 19.99% bank card debt is among the greatest returns you may get.”
Should you’re carrying a stability on a number of playing cards, use confirmed methods to pay it down, resembling switching to a low-interest bank card or stability switch bank card—each will help gradual the buildup of curiosity. You can additionally discover consolidating your debt right into a single fee plan.
How does your debt examine?
Canadians’ common bank card stability within the third quarter of 2024 was $4,562, based on TransUnion, considered one of Canada’s two credit score bureaus. That’s 6.97% increased than the identical interval in 2023.
2. Pay down your scholar debt
Do you continue to have scholar debt hanging over your head? Should you aren’t carrying any money owed that cost increased curiosity (like bank card debt), think about placing your bonus towards your scholar mortgage. For the 2022–2023 tutorial 12 months, the common Canada Scholar Mortgage stability on the time of leaving college was $15,091, based on Employment and Social Improvement Canada. It additionally notes that debtors sometimes repay the cash over 9 and a half years—think about slashing that by a 12 months or two.