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 cost of living or create a little bit of respiration room in your finances. However in case you’re maintaining with month-to-month obligations like hire, mortgage payments, family payments and loans, you’ll have some flexibility in the way you allocate these bonus bucks—together with saving in the direction of your financial goals.
“12 months-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 Resource. “I like to have a look at all my targets for the 12 months and see if something wants topping as much as resolve 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 you might not obtain as a lot as you suppose. Your employer may also deduct Canada Pension Plan (CPP) contributions and employment insurance coverage (EI) premiums, until you’ve reached your CPP and EI maximums for the 12 months.
In the event you don’t want that bonus cash straight away, you may have your employer switch it immediately into your registered retirement savings plan (RRSP), when you’ve got 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 all the cash could be put to work straight away.
A word about bonuses, RRSPs and taxes
Many staff get their bonus in February, a element that issues with regards to submitting your taxes. “Employment revenue—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, although it might be tied to 2024 efficiency by the worker or the corporate.”
In the event you direct your bonus to an RRSP, no taxes can be withheld. In the event you don’t do that yearly, nonetheless, that may create an unlucky mismatch, Heath notes. “Asking your employer to deposit your bonus on to your RRSP can lead to your full pre-tax bonus being invested straight away. However be careful. In the event you do that within the first 60 days of the 12 months, you get to say 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 when you’ve got some extra instant wants, these are essential to contemplate,” says Odetoyinbo. On that word, in case 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 sources for each.
1. Repay bank card payments and different high-interest money owed
When you’ve got high-interest debt on bank cards or a line of credit score, paying it down with a lump sum may prevent a whole bunch of {dollars} in curiosity funds, notes Odetoyinbo. “A cost to your 19.99% bank card debt is without doubt one of the greatest returns you will get.”
In the event you’re carrying a stability on a number of playing cards, use proven strategies to pay it down, corresponding to switching to a low-interest credit card or balance transfer credit card—each may also help sluggish the buildup of curiosity. You would additionally discover consolidating your debt right into a single cost plan.
How does your debt evaluate?
Canadians’ common bank card stability within the third quarter of 2024 was $4,562, in keeping with TransUnion, one in all 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? In the event you aren’t carrying any money owed that cost increased curiosity (like bank card debt), contemplate placing your bonus towards your scholar mortgage. For the 2022–2023 educational 12 months, the common Canada Student Loan balance on the time of leaving college was $15,091, in keeping with Employment and Social Development 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.