Maybe that money is already spoken for. Many Canadians are struggling financially right now, so a bonus or salary increase might simply help cover the rising cost of living or create a bit of breathing room in your budget. But if you’re keeping up with monthly obligations like rent, mortgage payments, household bills and loans, you may have some flexibility in how you allocate those bonus bucks—including saving towards your financial goals.
“Year-end bonuses are very exciting and tempting,” says Reni Odetoyinbo, a financial influencer in Toronto who shares money tips on her site, Reni, The Resource. “I like to look at all my goals for the year and see if anything needs topping up to decide how I spend the bonus.” (Read her Q&A with MoneySense.)
Are work bonuses taxed?
Before you start divvying up your dollars: Know that bonuses are taxed like your other wages, so you may not receive as much as you think. Your employer will also deduct Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums, unless you’ve reached your CPP and EI maximums for the year.
If you don’t need that bonus money right away, you could have your employer transfer it directly into your registered retirement savings plan (RRSP), if you have RRSP contribution room. No federal or provincial taxes will be withheld.
“Of course, the RRSP money is likely going to be stored away for a longer term, so if you have some more immediate needs, these are important to consider,” says Odetoyinbo. On that note, below are five ideas for how to spend a work bonus, plus links to tips and resources for each one.
Bonuses, RRSPs and taxes
Most employees get their bonus in February, a detail that matters when it comes to filing your taxes. “Employment income—salary or bonus—is taxable when paid,” says Jason Heath, a Certified Financial Planner and MoneySense columnist. “So, a February 2024 bonus is taxable in 2024, even though it may be tied to 2023 performance by the employee or the company.”
This can create an unfortunate mismatch, Heath notes. “Asking your employer to deposit your bonus directly to your RRSP can result in your full pre-tax bonus being invested right away. But watch out. If you do this in the first 60 days of the year, you get to claim the deduction on your previous year’s tax return. But the bonus is taxable in the year that it is received. Unless you do this every year, you could end up with a tax refund one year, but a balance owing the next year.”
Using this year’s bonus as an example, Heath says that if you direct your February 2024 bonus into your RRSP pre-tax, you’ll get an RRSP receipt for 2023. This could result in a tax refund for 2023; however, the income will be taxable in 2024, with no tax withheld.
1. Pay off credit card bills and other high-interest debts
If you have high-interest debt on credit cards or a line of credit, paying it down with a lump sum could save you hundreds of dollars in interest payments, notes Odetoyinbo. “A payment to your 19.99% credit card debt is one of the best returns you can get.”
If you’re carrying a balance on one or more cards, use proven strategies to pay it down, such as switching to a low-interest credit card or balance transfer credit card—both can help slow the accumulation of interest. You could also explore consolidating your debt into a single payment plan.
2. Pay down your student debt
Do you still have student debt hanging over your head? If you aren’t carrying any debts that charge higher interest (like credit card debt), consider putting your bonus toward your student loan. For the 2021–2022 academic year, the average Canada Student Loan balance at the time of leaving school was $15,578, according to Employment and Social Development Canada. It also notes that borrowers typically repay the money over nine and a half years—imagine slashing that by a year or two.
Jaclyn Law
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