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 (2018) is $2,593.80
Minus: Contributions to date for the year of $300.00
Equals the maximum that you can deduct for Joseph for the rest of the year, which is $2,293.80

Retroactive pay increase ($450.00) × CPP rate (4.95%) = CPP contributions from Joseph's retroactive pay ($22.28)

You should deduct CPP contributions of $22.28 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

Example 2 – More than one bonus payment a year

Example 3 – Retroactive pay increase

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