Maybe the money has been said. Many Canadians are currently struggling financially, so an increase in bonuses or salary may just help make up for the rising cost of living or create some breathing space in their budget. But if you are following monthly obligations like rent, mortgages, household bills, and loans, you may have some flexibility in the way you allocate these bonuses, including saving your financial goals.
“The year-end bonus is very exciting and tempting,” said Reni Odetoyinbo, a financial influencer in Toronto. “I like to look at all my goals for the year and see if there is a need to be full of interest to decide how I spend the bonus.” (Read with moneysense Her Q&A.)
Are job bonuses taxed?
Before you start allocating dollars: Know that bonuses are taxed like other wages, so you probably won’t receive as much imagination. Your employer will also deduct Canadian Pension Plan (CPP) contributions and Employment Insurance (EI) premiums unless you have reached the maximum amount of CPP and EI for the year.
If you don’t need to get a bonus right away, if you have an RRSP contribution room, you can transfer your employer directly to a registered retirement savings plan (RRSP). The benefit of this is that no federal or provincial taxes are retained (unlike your regular salary, from which payrolls you deduct taxes), so all the money can be put into use immediately.
Notes on bonuses, RRSPs and taxes
Many employees receive bonuses in February, which is essential for submitting taxes. “Employment income (Salley or bonus) is taxable,” said Jason Heath, a certified financial planner and Moneysense columnist. “So even if an employee or company may be associated with 2024 performance, the February 2025 bonus is in Taxable in 2025.”
If you direct your bonus to RRSP, you will not deduct taxes. Heath notes that if you don’t do this every year, it can create an unfortunate mismatch. “Requesting your employer to deposit the bonus directly into your RRSP may result in you investing in your entire pre-tax bonus immediately. But be careful. If you do this within the first 60 days of a year, you can ask for the previous year The tax return is deducted. But during the year you receive, the bonus is taxable. Unless you do this every year, you may end up with a one-year refund, but owe the balance next year.”
“Of course, RRSP funds may be stored for a long time, so if you have some more direct needs, it’s important to consider those needs.” At this point, if you don’t direct pre-tax bonuses to RRSP, There are five ways to use this money, and a link to each resource, link to tips and resources.
1. Pay off credit card bills and other high interest debts
Odetoyinbo notes that if you have high debt debt to your credit card or credit line, paying with a one-time payment can save hundreds of dollars in interest. “Paying to your 19.99% of your credit card debt is one of the best returns you can get.”
If you are holding a balance on one or more cards, use a validated strategy to repay the balance, such as switching to a low-interest credit card or a balance transfer credit card – both can help slow down interest accumulation. You can also explore consolidating debt into a single payment plan.
How do you compare your debts?
According to Transunion, one of Canada’s two credit bureaus, the average credit card balance for Canadians in the third quarter of 2024 was $4,562. This is 6.97% higher than the same period in 2023.
2. Pay your student debt
Do you still have student debts on your head? If you are not taking any debts that charge higher interest (such as credit card debt), consider paying your bonus to your student loan. According to Canadian employment and social development, the average student loan balance when leaving school is $15,091 during the 2022-2023 school year. It also noted that borrowers usually pay back the money in nine and a half years, which cuts the borrower by a year or two.
