Perhaps that cash is already spoken for. Many Canadians are struggling financially proper now, so a bonus or wage improve would possibly merely assist cowl the rising cost of living or create a little bit of respiration room in your finances. However if you happen to’re maintaining with month-to-month obligations like lease, mortgage payments, family payments and loans, you could 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 take a look at all my targets for the yr 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 it’s possible you’ll not obtain as a lot as you suppose. Your employer can even deduct Canada Pension Plan (CPP) contributions and employment insurance coverage (EI) premiums, except you’ve reached your CPP and EI maximums for the yr.
If you happen to don’t want that bonus cash straight away, you may have your employer switch it instantly into your registered retirement savings plan (RRSP), when you have RRSP contribution room. The advantage of doing this: no federal or provincial taxes shall 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 in terms of 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, though it might be tied to 2024 efficiency by the worker or the corporate.”
If you happen to direct your bonus to an RRSP, no taxes shall be withheld. If you happen to 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 straight away. However be careful. If you happen to do that within the first 60 days of the yr, you get to assert the deduction in your earlier yr’s tax return. However the bonus is taxable within the yr that it’s obtained. Except you do that yearly, you may find yourself with a tax refund one yr, however a stability owing the subsequent yr.”
“In fact, the RRSP cash is probably going going to be saved away for a long term, so when you have some extra quick wants, these are necessary to contemplate,” says Odetoyinbo. On that word, if you happen to 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 every one.
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 cost to your 19.99% bank card debt is among the finest returns you may get.”
If you happen to’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 can assist gradual the buildup of curiosity. You can additionally discover consolidating your debt right into a single cost plan.
How does your debt examine?
Canadians’ common bank card stability within the third quarter of 2024 was $4,562, in keeping with TransUnion, considered one of Canada’s two credit score bureaus. That’s 6.97% greater than the identical interval in 2023.
2. Pay down your pupil debt
Do you continue to have pupil debt hanging over your head? If you happen to aren’t carrying any money owed that cost greater curiosity (like bank card debt), take into account placing your bonus towards your pupil mortgage. For the 2022–2023 tutorial yr, 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 usually repay the cash over 9 and a half years—think about slashing that by a yr or two.
