# I got a bonus, and I had to pay a huge chunk of it as tax. What happened?

The bonus becomes part of your total compensation for the year. Let’s say your salary is \$36,000 and your employer gives you a \$500 bonus. You now need to be taxed as though you’re making \$36,500. The bonus calculations need to adjust for the boost in your annual earnings.

Employment Insurance (EI) is a straight percentage of earnings up to an annual maximum. It’s not the culprit, here.

Canada Pension Plan (CPP) is a straight percentage of earnings over \$3,500, to an annual maximum. The first \$3,500 of earnings is not pensionable. This exempt amount is spread over all of the pays in the year. So, on a salary of \$36,000, your weekly gross would be \$36,000 ÷ 52 = \$692.31. Your weekly non-pensionable earnings would be \$3,500 ÷ 52 = \$67.31. You pay CPP on only \$692.31 – \$67.31 = \$625.00.

However, if you receive the \$500 bonus on a separate cheque, you need to pay CPP on the whole bonus, because you’ve already had the exempt amount on your paycheque. That may make the CPP feel extra expensive.

Tax works in a similar way. In Canada, the first chunk of our income is tax-free: the basic personal exemption (for 2012, \$10,822 federally). Thereafter, increasing tax rates apply to different slices of our income. Here are the rates for 2012.

The tax amount on your weekly paycheque is a blended rate: 0% on the first slice, 15% on the next slice, and so on. However, a lump sum such as a bonus must be taxed at the marginal rate: the tax rate that applies to the next dollar of earnings. This can feel very costly, but in fact it’s fair.

To work this out for yourself, you can use the CRA Payroll Deductions Online Calculator, or your can try the manual method, explained in more detail here.

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