Bonus Tax in Canada

Bonus Tax in Canada: What Gets Withheld and What You Actually Owe

Canada has no special bonus tax rate. Your employer withholds income tax on a bonus with a CRA method that works out roughly your marginal rate, and CPP and EI come off too unless you have already reached their yearly maximums (how a whole cheque is built is in the Canadian paycheque guide, and both guides belong to the paycheque and employment standards hub). For an Ontario employee in 2026, a $10,000 bonus loses about $2,083 to withholding at a $45,000 salary, $3,058 at $90,000 and $4,497 at $150,000. The tax the same bonus adds on the return is within about $150 of each of those figures, so a big withholding bite is not an overpayment you lose.

What the CRA tells employers to do

The CRA's employers' guide (T4001) covers "bonuses, retroactive pay increases, or irregular amounts" in its chapter on special payments. Four rules matter to an employee.

1. CPP and EI apply. The guide lists bonuses among the amounts from which CPP contributions and EI premiums are deducted. For CPP, the yearly basic exemption is not applied again when the bonus is paid separately from regular pay, and no more is deducted once the year's maximum has been reached. For EI, premiums are deducted from bonuses and retroactive pay increases.
2. A 15% rule for small totals. After subtracting amounts such as RPP and RRSP contributions, the guide says to look at the employee's total remuneration for the year, including the bonus. If that total is $5,000 or less, the employer deducts 15% tax from the bonus (10% in Quebec). This is not the rule for ordinary workers, because a full-year salary is far above $5,000. It matters for a student or seasonal worker whose whole year of pay is small.
3. Above $5,000, tax is the extra tax on an annualised amount. For a bonus paid once a year, the employer divides the bonus by the number of pay periods, adds that to one regular pay, finds the tax on that higher pay and on the regular pay, takes the difference and multiplies by the number of pay periods. The CRA's own example is a $300 bonus on $400 weekly pay: $300 ÷ 52 = $5.77, tax is found on $405.77 and on $400, and the weekly difference is multiplied by 52. For bonuses paid more than once a year, each new bonus is added on top of the earlier ones in the same way.
4. RRSP contributions taken from the bonus reduce the amount taxed. The guide lists RRSP contributions among the amounts subtracted before tax is figured, if the employer has reasonable grounds to believe the employee can deduct them, for example because the employee confirmed the deduction or supplied a copy of their RRSP deduction limit statement.

The CRA's detailed formula document, T4127, expresses the same idea as a pair of calculations: annual tax with the bonus included minus annual tax without it. The point of all this machinery is that a bonus is taxed as if it were a slice of income stacked on top of your regular pay. That stacking is why withholding tracks your marginal rate.

The CRA method on one bonus, step by step

The T4001 method is easier to trust once you see it run. Take the $90,000 Ontario employee paid biweekly, with a $10,000 bonus in a pay period after the CPP and EI maximums have been reached.

The tax withheld on the bonus is the difference, $21,309.85 − $18,251.64 = $3,058.21. Federal tax accounts for $2,050.00, exactly 20.5% of the $10,000. Ontario accounts for $1,008.21, which is 9.15% of the bonus ($915.00) plus $93.21 of surtax, because the extra income pushes basic Ontario tax from $5,369.06 to $6,284.06 and across the $5,818 line where the surtax begins. The health premium is already at its $750 cap in both columns, so it adds nothing. This is the whole mechanism: no special rate, just the tax on a bigger annual income minus the tax on the smaller one.

Three employees, one $10,000 bonus

The employees in this guide are made up: Ontario residents with only the basic personal amounts, paid biweekly, run through the CRA's published payroll formulas rather than the CRA's own calculator, so a real bonus can differ by a few dollars. The table shows what happens to a $10,000 bonus paid in the last biweekly pay of 2026. "Withheld" is the income tax the CRA method takes from the bonus. "True tax" is what the bonus adds to the year's tax on the return, computed by taxing the year with and without it.

The last row is the bonus less the true tax and less any CPP and EI. It is what you keep after the return is filed. The gap between "cash that reaches you" and "what you keep" is the small refund the withholding method hands back at tax time: $148.49, $67.51 and $17.58.

Three details explain the table.

CPP and EI only show up in the first column. At $45,000 the extra $10,000 takes pay to $55,000, still below the $74,600 CPP ceiling and the $68,900 EI ceiling, so the bonus pays 5.95% CPP ($595.00) and 1.63% EI ($163.00). At $90,000 and $150,000 the regular salary already pushed past those ceilings (and past the $85,000 where CPP2 stops), so the bonus pays no CPP, CPP2 or EI at all.

The percentage rises with the salary. The 20.8% at $45,000 is a blend: the bonus lifts pay from $45,000 to $55,000, so it starts in the 19.05% band and ends in the 23.15% band. At $90,000 the bonus starts in the 29.65% band and its top part crosses into the 31.48% band, which gives about 30.6%. At $150,000 the whole bonus sits in a band with a 26% federal rate and a 12.16% Ontario rate, plus Ontario's surtax of 20% and 36% on the Ontario tax above two thresholds ($5,818 and $7,446 of basic Ontario tax in 2026), which lifts the combined rate on a marginal dollar to about 45%.

The withholding overshoots by a small amount. The method is built to track your marginal rate, but it does not model your year-to-date credits exactly, and in every example here withholding came out a little above the true tax. The three differences in the table are $148.49, $67.51 and $17.58.

The combined marginal rate, by taxable income

If you want to estimate any bonus, the rate to use is the combined marginal rate at the top of your taxable income. This table adds the federal rate and the Ontario rate, including Ontario's surtax, for 2026.

The federal and Ontario bracket thresholds and rates come from the CRA's payroll formulas (T4127, January 2026). The surtax multiplies Ontario basic tax by 1.20 above $5,818 and by 1.56 above $7,446, which is what lifts the Ontario column; the approximate income levels where the surtax starts are about $98,000 and $115,000 for an employee with default claims. In the two bands above $181,440 the federal rate is shown as 29.30% rather than 29%, because the federal basic personal amount phases down from $16,452 to $14,829 between $181,440 and $258,482 (T4127: BPAF = $16,452 − (NI − $181,440) × ($1,623 ÷ $77,042)), and each extra dollar of income removes about 2.1 cents of the basic amount, which at the 14% credit rate is the 0.29 points. These are rates on one more dollar of employment income. They do not include CPP or EI, which add 7.58% (5.95% CPP and 1.63% EI) on a bonus below the ceilings and nothing above them.

When the bonus crosses a threshold

A bonus that straddles a bracket edge is taxed at a blend. The next two examples show it.

At $55,000 the bonus starts in the 23.15% band and ends in the 29.65% band, so the withheld rate (27.0%) is a blend. At $104,000 it crosses the surtax step and the $107,785 bracket edge. At $190,000 it sits wholly in the 48.26% band, so the two figures are the same in this model, because both are built from the same annual formulas. Payroll software rounds each step and applies credits slightly differently, so a real withholding amount can differ by a few dollars.

The $5,000 rule in practice

The 15% rule gets repeated online as "bonuses under $5,000 are taxed at 15%," which misreads the CRA's guide. The test is on the employee's total remuneration for the year, after the listed deductions, not on the bonus alone. For a full-time employee earning $45,000, even a $200 bonus is part of a total well above $5,000 and is taxed by the annualising method, not at a flat 15%.

The rule is real for a small total. Take a student who earns $1,800 in wages during the year and receives a $2,500 bonus. The total including the bonus is $4,300, which is under $5,000, so the employer deducts 15% of the bonus: $375. If that same $2,500 bonus went to someone whose total for the year was $45,000, the annualising method applies instead.

Sending the bonus to your RRSP

An RRSP contribution made through payroll is subtracted from the bonus before tax is figured, so the withholding on that part is zero when the employer is satisfied you can deduct it. At the $90,000 salary, the tax result is plain: with $10,000 of the bonus going to an RRSP, the year's tax is $17,033.08, the same as with no bonus at all, because the bonus income and the RRSP deduction cancel. The bonus still reaches your RRSP in full, rather than being cut to $6,941.79 after withholding.

The second column of the earlier table shows the cost of not doing it: $3,058.21 withheld and $2,990.70 of true tax. Putting the bonus in the RRSP is a deferral, not a gift. (The Canadian income tax estimator runs the yearly tax with and without a bonus, and the CPP contribution decoder shows how much CPP your total pay triggers.) The money is taxed when it comes out in retirement, and the RRSP contribution uses room. The CRA's rule about reasonable grounds means the employer will want your RRSP deduction limit statement or your confirmation before it reduces withholding.

Two cautions. First, check your room on your Notice of Assessment before relying on it. Second, an RRSP deposit from a bonus at the $45,000 salary still has CPP ($595) and EI ($163) to pay on it, because contributions to an RRSP do not reduce pensionable or insurable earnings. The $758 comes out of the bonus or your other pay, so the amount that can be deposited is smaller than $10,000 unless you top it up.

For how the choice between an RRSP and a TFSA works at different incomes, see the RRSP vs TFSA guide. The 2026 bracket thresholds are in the Canada income tax brackets guide.

Why "I got taxed 40% on my bonus" feels true

A bonus feels heavily taxed for three reasons that have nothing to do with a special rate.

1. You compare it to your regular cheque's average rate. If the regular cheque loses 22% to income tax, a bonus that loses 30% looks like a penalty. The bonus is taxed at the marginal rate, which is always higher than the average rate.
2. CPP and EI take another 7.58% below the ceilings. For employees below the ceilings, the bonus loses income tax and CPP/EI, which can make the cash-in-hand figure look 10 to 15 points lower than expected.
3. The refund comes later. If withholding overshoots by $150, you get it back in a refund months later, but you do not see it on the bonus cheque.

Two bonuses in one year

For a bonus paid more than once a year, the CRA's method layers each bonus on top of the earlier ones, so the total withholding does not depend on how the bonus is split. The $90,000 Ontario employee who receives two $5,000 bonuses in the last pay periods of the year (after the CPP and EI maximums are reached) has:

That equals the $3,058.21 withheld on a single $10,000 bonus. The second bonus is taxed at a higher rate than the first, 31.5% against 29.7%, because it sits on top of it and reaches into the band where Ontario's surtax applies. Splitting a bonus into two payments in the same year therefore does not reduce the tax. It only changes when each part is withheld, and it matters only if the two payments fall in different calendar years.

Timing: a bonus in January or in December

A reader with a $90,000 salary might wonder whether the month matters. For income tax, it does not change the year's total: the bonus is taxed in the year it is paid, and the withholding method treats a January bonus and a December bonus the same way. For CPP and EI, the yearly maximums mean the timing changes only when the money leaves each cheque.

Take the $90,000 Ontario employee with a $10,000 bonus. In the December example above, the regular cheques had already paid the year's $4,230.45 of CPP and $1,123.07 of EI, so the bonus paid none. If the same bonus arrives in the first biweekly cheque of January instead, that cheque has gross pay of $13,461.54 and pays $792.95 in CPP and $219.42 in EI. The later cheques then stop paying sooner: EI stops after cheque 18 instead of cheque 20, and CPP stops after cheque 19 instead of cheque 22. The year's totals are still $4,230.45 and $1,123.07. A January bonus front-loads the contributions and gives you slightly bigger cheques in the autumn.

For someone below the ceilings, there is no such offset. A $45,000 salary with a $10,000 bonus pays an extra $758 of CPP and EI whenever the bonus is paid, because total pay of $55,000 never reaches either maximum.

Retroactive pay and other lump sums

The CRA's guide groups bonuses with retroactive pay increases and "irregular amounts". The same annualising method applies: the lump sum is divided by the number of pay periods, added to a regular pay, and the extra tax is multiplied back up. The guide also has a separate section for "qualifying retroactive lump-sum payments" with its own treatment of CPP, EI and income tax, which this article does not cover; if your payment is back pay for an earlier year, read that section of T4001 or ask your payroll department which rule applied.

Termination pay is a different kind of payment and is not covered by this article. The severance pay guide covers how that money is taxed and how it affects EI.

What to do when withholding looks wrong

If the tax on your bonus stub is far off the estimate from the marginal-rate table, three things can explain it.

• Your claim amounts. The withholding uses the claim amounts on your TD1 forms. If you have two jobs and both apply the basic personal amount, the combined withholding is too low and you will owe at filing; if you claim zero, it is too high.
• A cheque with extra deductions. A group RRSP, pension or union dues paid from the same cheque reduce the income the formula sees.
• A bonus paid in several instalments. For bonuses paid more than once a year, the CRA method layers each one on top of the earlier ones, so each instalment is taxed at a higher rate than the one before.

None of these is a way to avoid tax. They change the timing of when tax is withheld, and the return settles the difference. The one way to lower the actual tax is a deduction such as an RRSP contribution, which is why the RRSP route above produces a different result in the year's tax and not just in the withholding.

Sources

• CRA, T4001 Employers' Guide, Payroll Deductions and Remittances, chapters on CPP, EI and special payments (bonuses, retroactive pay increases or irregular amounts; the $5,000 and 15% rule; the annualising method; RRSP contributions; CPP basic exemption not applied to a bonus paid separately): https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4001/employers-guide-payroll-deductions-remittances.html (checked October 23, 2026)
• CRA, T4127 Payroll Deductions Formulas, 122nd Edition, effective January 1, 2026 (bonus options, federal and Ontario rates, federal basic personal amount phase-down, surtax, health premium): https://www.canada.ca/en/revenue-agency/services/forms-publications/payroll/t4127-payroll-deductions-formulas/t4127-jan/t4127-jan-payroll-deductions-formulas-computer-programs.html (checked October 23, 2026)
• CRA, T4127, 123rd Edition, effective July 1, 2026 (same federal and Ontario rate tables and surtax thresholds; no change for Ontario): https://www.canada.ca/en/revenue-agency/services/forms-publications/payroll/t4127-payroll-deductions-formulas/t4127-jul/t4127-jul-payroll-deductions-formulas.html (checked October 23, 2026)
• CRA, CPP contribution rates, maximums and exemptions: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/canada-pension-plan-cpp/cpp-contribution-rates-maximums-exemptions.html (checked October 23, 2026)
• CRA, EI premium rates and maximums: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/employment-insurance-ei/ei-premium-rates-maximums.html (checked October 23, 2026)
• Withholding figures are an estimate built from the T4127 annual formulas, not a run of the CRA's Payroll Deductions Online Calculator.