Perhaps that cash is already spoken for. Many Canadians are struggling financially proper now, so a bonus or wage improve may merely assist cowl the rising cost of living or create a little bit of respiratory room in your price range. However when you’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 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 yr 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, except you’ve reached your CPP and EI maximums for the yr.
In the event you don’t want that bonus cash straight away, you possibly can 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 will probably be withheld (in contrast to your common pay, from which taxes are taken off every paycheque), so the entire cash will be put to work straight away.
A notice about bonuses, RRSPs and taxes
Many staff get their bonus in February, a element that issues in relation to submitting your taxes. “Employment earnings—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, despite the fact that it could be tied to 2024 efficiency by the worker or the corporate.”
In the event you direct your bonus to an RRSP, no taxes will probably be withheld. In the event you 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 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 yr, you get to say the deduction in your earlier yr’s tax return. However the bonus is taxable within the yr that it’s obtained. Until you do that yearly, you possibly can find yourself with a tax refund one yr, however a steadiness owing the subsequent yr.”
“In fact, the RRSP cash is probably going going to be saved away for a long term, so when you’ve got some extra rapid wants, these are vital to contemplate,” says Odetoyinbo. On that notice, when you don’t direct your pre-tax bonus to an RRSP, listed here 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
You probably have high-interest debt on bank cards or a line of credit score, paying it down with a lump sum might 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 finest returns you will get.”
In the event you’re carrying a steadiness on a number of playing cards, use proven strategies to pay it down, similar to switching to a low-interest credit card or balance transfer credit card—each will help gradual the buildup of curiosity. You possibly can additionally discover consolidating your debt right into a single cost plan.
How does your debt examine?
Canadians’ common bank card steadiness within the third quarter of 2024 was $4,562, in response to TransUnion, considered one of 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), think about placing your bonus towards your scholar mortgage. For the 2022–2023 educational yr, the typical Canada Student Loan balance on the time of leaving college was $15,091, in response to 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 yr or two.
