By OptiVal Editorial Desk
Bonus season sneaks up on most owners. December arrives, the year went well, and you decide to hand out bonuses to your people. Then your bookkeeper asks one awkward question: “What tax do I take off this?” Here is the straight version of how bonuses are taxed in Canada, the payroll rules behind them, and the five-step checklist that keeps a year-end bonus from turning into a remittance problem.
A bonus is not a gift. In the CRA’s eyes it is employment income, same as a paycheque, taxed in the year you pay it. Income tax, CPP and EI all apply, subject to the same annual maximums. The twist is that bonuses use a different withholding method than regular salary: the lump-sum tax rates.
How are bonuses taxed in Canada: the lump-sum withholding table
When you pay a bonus, you do not use the regular payroll tax tables. CRA Guide T4001 tells employers to use lump-sum withholding rates:
- 10% on amounts up to and including $5,000
- 20% on amounts over $5,000 up to and including $15,000
- 30% on amounts over $15,000
In Quebec the rates are half (5%, 10%, 15%) because the province collects its own income tax. One detail that catches employers off guard: you combine all lump-sum payments to the employee in the calendar year before picking the rate. If you already paid a $6,000 bonus in March and pay a $10,000 bonus in December, the second bonus sits in the over-$15,000 band, so you withhold at 30%, not 20%.
Take a $20,000 year-end bonus for an Ontario employee. The lump-sum rate is 30%, so you withhold $6,000 in income tax. That is withholding, not the final bill. When the employee files their return, total income, credits and deductions decide the real tax. They may owe more or get some of it back.
CPP and EI still apply to bonuses
A common mistake is thinking the bonus gets “special” treatment for payroll deductions. It does not. Bonuses count as pensionable earnings for CPP and insurable earnings for EI, right up to the annual maximums. For 2026, that means CPP applies to earnings up to $74,600 at 5.95% from each of you and the employee after the $3,500 basic exemption, with earnings between $74,600 and $85,000 attracting the second-tier CPP contribution at 4%. EI applies up to $68,900 at 1.63% for the employee and 2.282% for the employer.
So before you calculate the bonus withholding, check where the employee stands year-to-date against those ceilings. An employee who already maxed out CPP and EI on regular salary owes no further deductions on the December bonus. An employee who has not gets them applied to the bonus too. Your bookkeeper should be running a YTD ceiling check on every bonus.
The four bonus mistakes that cost employers real money
Mistake 1: Using the regular tax tables instead of the lump-sum rates. Payroll software handles this automatically if the payment is coded as a bonus, but manual calculations and spreadsheets often run bonuses through the regular pay-period table. That usually withholds too little, and the employee owes the balance in April.
Mistake 2: Forgetting earlier lump sums in the same year. The rate bands stack across the calendar year, as the March-plus-December example above shows. Track every lump-sum payment per employee, or the December bonus can end up under-withheld.
Mistake 3: Deducting CPP and EI after the ceilings are hit. This creates overpayments you then have to reconcile on the T4 and PD7A. The mirror image is worse: skipping CPP and EI on a bonus for an employee who has not hit the ceiling. Both directions create work and invite CRA questions.
Mistake 4: Remitting late. Bonus deductions are remitted on your normal payroll schedule, which for most small businesses means by the 15th of the month after the bonus is paid. A December bonus paid on December 19 means the deductions are due January 15. Miss that and you face the late-remittance penalties: 3% to 10% of the amount owing depending on how many days late, plus interest. Our breakdown of what late payroll remittance actually costs is worth a read before bonus season hits.
How a bonus shows up on the T4
Bonuses are reported in Box 14 of the T4 as part of employment income. The CPP pensionable earnings go in Box 26, EI insurable earnings in Box 24, and the income tax withheld in Box 22. There is no separate bonus slip or special code.
That simplicity is the trap. Because there is nothing special on the slip, owners assume there is nothing special in the processing. But the lump-sum withholding, the YTD stacking and the ceiling checks all happen before the numbers land on the T4.
The five-step bonus payroll checklist
1. Decide the timing and the gross amount. Bonuses are taxed in the year paid, so a bonus paid December 31 is a 2026 bonus. If cash flow is tight, January is fine too, but do not straddle the year-end accidentally.
2. Run year-to-date totals per employee. Total lump-sum payments already paid this year (to set the withholding band), plus YTD pensionable and insurable earnings (for the CPP and EI ceilings).
3. Apply the lump-sum withholding rates. 10%, 20% or 30% based on combined lump sums for the year (5%, 10%, 15% for Quebec employees). Remember it is withholding, not the final tax.
4. Deduct CPP and EI only if the ceilings are not hit. 2026 ceilings: CPP to $74,600 at 5.95% (plus $74,600 to $85,000 at 4%), EI to $68,900 at 1.63% employee and 2.282% employer.
5. Remit on your normal schedule and document everything. Most employers remit by the 15th of the following month. Keep a one-page record per employee showing the bonus amount, the rate applied, the YTD lump-sum total behind it, and the CPP/EI position. When the CRA asks, that page ends the conversation.
One optional sixth step: the gross-up. Some owners want the employee to receive a round number, say $10,000 net. You can gross up the bonus so the employee lands on $10,000 after withholding, but the grossed-up amount is what CPP and EI apply to. Decide before payroll runs, not after.
Bonuses, remote staff and multi-province teams
Bonuses get trickier when your team is spread out. Provincial tax factors into the composite lump-sum rate, Quebec has its own rates and its own remittance path, and employees working in more than one province need their province-of-employment set correctly. If your team spans provinces, the multi-province payroll rules are worth a read before you cut the cheques. This is where a disciplined remote bookkeeper earns their keep: the YTD tracking, the ceiling checks and the remittance timing are exactly the kind of detail work that slips when payroll is a side-of-desk job.
Paying a year-end bonus should feel like a reward, not a compliance exercise. If you would rather have the withholding math, the remittance timing and the T4 reporting handled properly, book a free consultation. Our payroll service runs $29 per employee per month with a one-time $149 setup.
