Bonuses, retroactive pay increases or irregular amounts

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Bonuses, retroactive pay increases or irregular amounts

If you paid bonuses, retroactive pay increases, or any other additional or unusual amounts to your employees, you have to deduct all of the following amounts:

  • Canada Pension Plan (CPP) contributions (without taking into consideration the annual basic exemption amount if the payment is made separately from their regular pay)
  • employment insurance (EI) premiums
  • income tax

Note


Certain retroactive payments related to previous years that are paid in the current year, are eligible for a special tax calculation when the employee files their income tax and benefit return. For more information, go to Qualifying retroactive lump-sum payments.

CPP contributions

If you have already deducted the yearly maximum CPP contributions from an employee's income, do not deduct more contributions.

Do not take into account any contributions that a previous employer deducted in the same year.

Example

Joseph receives a retroactive pay increase of $450.00 on June 29. His payroll record for the year indicates that, to date, you have deducted $300.00 in CPP contributions.

Maximum CPP contribution for the year (2022) is $3,499.90
Contributions to date for the year of $300.00

Maximum that you can deduct for Joseph for the rest of the year is $3,199.80

Multiply the retroactive pay increase of $450 × the CPP rate of 5.70% = $25.65

You should deduct CPP contributions of $25.65 from Joseph’s retroactive pay increase up to the maximum for the year.

Notes

The Payroll Deductions Online Calculator (PDOC) calculates the CPP contributions, EI premiums, and income tax on bonuses and retroactive pay increases.

EI premiums

You have to deduct EI premiums from bonuses and retroactive pay increases. Do not deduct more than the maximum for the year.

Do not take into account any premiums that a previous employer deducted in the same year.

Income tax

Certain qualifying retroactive lump-sum payments are eligible for a special tax calculation when an individual files their income tax and benefit return.

To determine how much income tax to deduct from bonuses or retroactive pay increases, take the total remuneration for the year (including the bonus or increase) and subtract the following amounts:

  • a deduction for living in a prescribed zone
  • an amount that a tax services office has authorized
  • registered pension plan (RPP) contributions
  • union dues
  • employee's contributions to a retirement compensation arrangement (RCA) or certain pension plans
  • contributions to a registered retirement savings plan (RRSP) provided you have reasonable grounds to believe the contribution can be deducted by the employee for the year

After subtracting these amounts, if the total remuneration for the year, including the bonus or increase, is $5,000 or less, deduct 15% tax (10% in Quebec) from the bonus or retroactive pay increase.

After subtracting the above amounts, if the total remuneration for the year, including the bonus or increase, is more than $5,000, the amount you deduct depends on whether the bonus is paid once a year or more than once a year.

Examples 1 and 2 show you how to manually calculate the amount to deduct in the case of a bonus. Example 3 shows you how to manually calculate this amount in the case of a retroactive pay increase.

Example 1 – First or once-a-year bonus payment

Donna earns a salary of $400 per week. In September, you gave her a bonus of $300. Her province of employment is British Columbia. The claim code that applies to her TD1 and TD1BC forms is "1."

Step 1: Divide the bonus by the number of pay periods in the year ($300 ÷ 52 = $5.77).

Step 2: Add the $5.77 to the current pay rate of $400. As a result, the adjusted pay rate for the year is $405.77 per week.

Step 3: In Guide T4032, Payroll Deductions Tables, choose the weekly tables (52 pay periods a year) from Sections D and E to find the increased weekly federal and provincial tax you should deduct on the additional $5.77 per week.

Calculate as follows:

  • Find the federal and provincial tax that you deduct on $405.77 per week
  • Subtract the federal and provincial tax that you deduct on $400 per week

The result is the tax you have to deduct on the additional $5.77 per week.

Step 4: Multiply the additional tax you deduct per week by 52 (the number of pay periods in the year). This gives you the amount of income tax to deduct from the bonus of $300.

Example 2 – More than one bonus payment a year

Mario earns a salary of $400 per week (amount 1). You paid him bonuses of $300 in January and $780 in February. His province of employment is Alberta. The claim code that applies to his TD1 and TD1AB forms is "1."

The calculation must take into account all bonuses you paid during the year. You have to calculate the amount of tax to deduct for the entire year, regardless of when you paid the bonus.

Step 1: Divide the bonus you paid in January by the number of pay periods in the year ($300 ÷ 52 = $5.77) (amount 2). Add the $5.77 to the weekly salary of $400 to determine the adjusted weekly pay before the February bonus ($400 + $5.77 = $405.77).

Step 2: Divide the last bonus you paid to Mario by the number of pay periods in the year ($780 ÷ 52 = $15) (amount 3). Add amounts 1, 2, and 3 to determine the adjusted weekly pay for the year of $420.77 ($400 + $5.77 + $15).

Step 3: In Guide T4032, Payroll Deductions Tables, choose the weekly tables (52 pay periods a year) from Sections D and E to find the increased weekly federal and provincial tax you should deduct on the additional $15 per week.

Calculate as follows:

  • Find the federal and provincial tax that you deduct on $420.77 per week
  • Subtract the federal and provincial tax that you deduct on $405.77 per week

The result is the tax you have to deduct on the additional $15.

Step 4: Multiply the additional tax per week by 52 to determine the amount to deduct on the bonus of $780.

To calculate tax on additional bonuses, repeat steps 1 to 4.

Example 3 – Retroactive pay increase

Irene's pay increased from $440 to $460 per week. The increase was retroactive to 12 weeks, which gives her a total retroactive payment of $240 (12 × $20). Her province of employment is Nova Scotia. The claim code that applies to her TD1 and TD1NS forms is "6."

Step 1: In Guide T4032, Payroll Deductions Tables, choose the weekly tables (52 pay periods a year) from Sections D and E to find the increase in the weekly federal and provincial tax that you should deduct because of the increased pay rate.

Calculate as follows:

  • Find the federal and provincial tax that you deduct on $460 per week
  • Subtract the federal and provincial tax that you deduct on $440 per week

The result is the tax you have to deduct on the additional $20 per week.

Step 2: Multiply the increase in the weekly tax that you deduct by the number of weeks to which the retroactive pay increase applies. This amount is the tax that you must deduct from the retroactive payment.


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Date modified:
2024-03-22