How’s My Bonus Taxed in Canada? A Tax Expert Explains
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Bonuses. I love them. They often come at the best times, like when you’re wondering how to fund your significant other’s birthday party or when your role as an uncle means the Christmas gift list keeps growing yearly.
If you’re like me, the taxes on bonuses never seem to make sense. One day it’s X%. The next time it’s 2X%. Gosh, eventually I stopped bothering. I’ll take whatever I see in there.
So, I asked Jerry, friend, fellow immigrant, but one who understands the Canadian tax system better than me, about how our bonuses are taxed in Canada (cos I assume you wanna solve this mystery once and for all, right?).
Jerry, take it away.
To Understand Taxes on Bonuses, We Need to Understand Tax Rates
For the average person who may not understand how taxes are calculated or be interested in finding out, taxes can be complicated. It can be frustrating that taxes significantly reduce our pay after working hard. If the reward for hard work comes at “half” the price, it can feel unfair. Nonetheless, understanding the basics of taxes is key to unlocking wealth in a progressive economy like Canada.
To explain taxing bonus payments, we need to understand average and marginal tax rates.
The average tax rate of an income is calculated by dividing the total income by the total tax paid. For example, if an individual earns $100,000 per year and pays $10,000 in taxes, the average tax rate is 10%. The marginal tax rate is the tax rate on the next dollar of income earned, meaning the rate on each additional dollar may not be the same.
Canada uses a progressive tax system, meaning tax rates increase with income. This applies at both federal and provincial levels.
For a $100,000 income, the federal tax would be 15% on the first $55,867 and 20.5% on the remaining $44,133, resulting in an approximate tax rate of 17%. This shows a 7% increase compared to the earlier rate of 10%.
This is also how our bonuses are taxed, but there’s a twist.
In a fixed-hour, fixed-pay situation, the income due to an employee by an employer is known and agreed upon from the start of the employment contract.
The tax deducted from each pay is typically fixed, so the take-home pay is almost guaranteed to be the same. Meanwhile, bonuses are typically a percentage of one’s pay and are determined by factors like company profitability and employee performance.
Taxes owed from a bonus payment can’t be factored in until paid. Now, this is where it gets interesting.
To determine the tax on the bonus, your employer will add the bonus to your salary, then subtract that from the tax on just the salary. However, because this will likely push the individual into a higher tax bracket, the tax rate on the bonus is often higher.
Everything seems clearer with figures, so let’s break this down using our previous example.
Income at C$100,000:
Additional C$20,000 bonus during the year:
The tables show that the total tax on an annual income of $100,000 increases by around $6,500 due to a $20,000 bonus. This difference amounts to the tax on the bonus.
When taken in isolation, a $6,500 deduction on a $20,000 pay amounts to a 33% tax rate, which seems too high for a $20,000 pay.
This is just the income tax. Other deductions like CPP and EI premiums could also be deducted from your bonus if the maximum deductible amounts for the year haven’t been reached.
These deductions explain why your net bonus varies or looks smaller sometimes.
Helpful?
References:
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Okay—if I’m understanding your numbers correctly, your effective tax rate clocks in around 29%.
By U.S. standards? That’s a bargain.
Let’s assume you’re a single filer earning about $120,000 in salary and bonus. Based on your figure, you’re paying roughly $34,000 in total taxes.
Now, what would you owe if you were earning that same income in the U.S.?
Well…
Federal income tax: Roughly $18,000. That puts you solidly in the 24% bracket. Middle of the pack.
FICA (Social Security and Medicare): Another $9,000. Since the Social Security cap is $168K, your entire income is subject to the 7.65% payroll drag.
State income tax: Unless you live in Texas, Florida, or Nevada, you’ll pay $4,000–$6,000, depending on where you live. Let’s split the difference: $5,000—roughly 5% of your AGI.
Local income tax: If you live in NYC, Philadelphia, or Detroit, tack on another $2,000–$3,000. For this example, we’ll assume you don’t—but it’s worth noting that many people do.
Property tax (baked into rent): Even if you rent, you’re covering your landlord’s property tax in your monthly check. National average? About $5,000/year.
Use taxes and fees: DMV registrations, tolls, park fees, special district levies—call it $4,000, conservatively.
So what’s the total?
All in, you're looking at $39,000 to $41,000 in annual taxation as a U.S. single filer on $120K.
Compare that to your $34,000 in Canada?
I'll take that deal every day of the week—and twice on Sunday. 😎
Bottom line: Despite the myth that Canada is a "high tax" country, it’s actually cheaper for a middle-class single than the U.S. Once you factor in property taxes, payroll drag, and the hidden nickel-and-dime nonsense that defines American municipal finance, the truth becomes pretty obvious:
The U.S. isn’t low-tax. It’s just sneakily extractive.
OH... one more thing... I forgot to compare apples to apples... I treated CAD and U.S. dollars comparatively equal. That's not the case.
When I compare apples to apples by taking 90K in the U.S. v. 120K Canadian... the math comes out as total taxation of about 30K... which is a 33% rate in the U.S.
When I calculate what the taxes would be in dollars on that income if I lived in Canada... it's a 28% effective tax rate... ALL IN.
Again.... you're still better off in Canada—by about 4 to 5 percentage points of effective tax burden.
And remember: the Canadian rate includes health insurance, while the U.S. number does not. Add employer premiums, deductibles, co-pays, and post-tax premiums in the U.S. and the gap widens considerably. Most people pay for "crappy mediocre care" in the U.S. about 5K a year in premiums for health, dental, vision, etc.