As the year comes to an end, employers may choose to compensate employees beyond their regular pay for any accomplishments they achieved during the year.
The extra cash may be a welcome sight for employees, but it means extra attention is needed by the payroll department.
"A lot of the bonuses that are paid out have to do with the employee’s hours of work, their productivity or efficiency, and how well — and how profitable — the organization (did) this year," says Annie Chong, manager of the payroll consulting group at Carswell, a Thomson Reuters business.
"It’s very common for organizations to pay a once-a-year bonus," she says, adding that it’s also common to tie the value of the bonus to the profitability of the company. "If we don’t do well, if we don’t make money, we don’t pay out bonuses. That’s just the reality of how incentive bonuses are determined — but not every organization decides they want to pay bonuses."
Annual cash bonuses
If an organization decides to reward its workforce with a cash bonus, the amount will be subject to certain deductions.
"In the eyes of the CRA — Canada Revenue Agency — or Quebec if you have a Quebec payroll, a bonus is employment income and it’s treated like regular employment income, so therefore it is going to be subject to all statutory deductions," she says.
This includes the following:
• Canada Pension Plan (CPP)
• employment insurance (EI)
• federal income tax deductions
• provincial income tax deductions.
Organizations in Quebec are also subject to statutory deductions, but the order of deductions are different from the rest of the country.
"In the province of Quebec, they pay into the QPP, which is the Quebec Pension Plan, employment insurance, QPIP, which is the Quebec Parental Insurance Plan, as well as federal and province Quebec income tax deductions," says Chong. "As such, they report it as income at the end of the year."
"Typically, bonuses are paid in the form of cash, but there are cases where companies may choose to pay bonuses in-kind," Chong says. "For example, an all-expense paid trip — your airline tickets, your hotel, your incidental costs, your meals, everything is covered as a form of bonus."
An in-kind bonus, which also includes stock options, is considered a taxable benefit (as opposed to taxable income) and, as a result, are only subject to CPP/QPP and income tax. They are not subject to EI or QPIP in Quebec as they are considered a non-cash taxable benefit
"Let’s say the value of the trip is $3,000," says Chong. "The dollar value of $3,000 is an amount that has to be added to the employee’s income. Yes, you do have to have remuneration that’s payable in order to collect the value of the CPP/QPP or taxes from that fair market value of $3,000."
Payroll professionals working with third-party administrators will have to communicate this information to the service provider.
"You have to literally communicate to the third party exactly how you want that payment or calculation done," she says. "That’s why we talk about how critical it is for the payroll professional to understand clearly what the legislative requirements are because at the end of the day it is our responsibility to ensure we are compliant"
Transferring bonuses for savings
Employers may choose to give employees the option of transferring a cash bonus to a registered retirement savings plan (RRSP) or a registered pension plan (RPP) provided they have not exceeded their annual contribution limits. However, employers must continue to collect CPP/QPP and EI/QPIP from that amount.
The amount an employee is permitted to transfer will be indicated on their T1 Assessment from the previous year.
"On that T1 Assessment, there is a line which speaks to the personal RRSP room that you have left," Chong says. "That is where the employee has to validate that he or she has that personal room or whatever that value is."
Once the employee has given the employer something in writing validating they have the room to transfer money into their RRSP or RPP, the payroll department can proceed with administering.
Chong insists the transfer must be made by a cheque payable to the employee’s bank.
"If you issue the cheque in the employee’s name, you do have to tax it first," she says. "So, according to the regulation, the employer has to physically do the transfer on the employee’s behalf."
There’s no legal requirement requiring organizations to give their employees the option to transfer money into their RRSP or RPP, Chong adds.
Organizations dealing with a national payroll will need to consider payroll tax levies, Chong says.
"For example, here in Ontario, we have what we call the Employer Health Tax (EHT)," Chong says. "So, the employer has to pay EHT to the Ministry of Finance based on their total payroll in Ontario."
The four jurisdictions with this type of levy are:
• Ontario — The Employer Health Premium.
• Quebec — The Quebec Health Services Plan.
• Manitoba — The Health and Post Secondary Education Tax Levy.
• Newfoundland and Labrador — The Health and Post-Secondary Education Tax.
Employment standards are a provincial arm of government that legislate provisions such as hours of work, overtime, termination requirements.
Employers are either federally regulated (falling under the Canada Labour Code) or they are subject to provincial guidelines. Every jurisdiction has its own form of employment standards regulations. Under these pieces of legislation, bonuses may be subject to vacation pay.
"For example, in Ontario, bonuses are vacationable," Chong explains. "In other words, if you paid a $1,000 bonus, you have to be mindful that this $1,000 is subject to vacation pay."
A bonus payment may also be subject to workers compensation premiums.
"In most cases, worker-related bonuses are… also assessable or insurable — that’s the term they use — in the eyes of workers compensation," she says.
Other common forms of bonuses include signing bonuses and retention bonuses, Chong says. These types of bonuses are subject to the same deductions.
Paying out a bonus doesn’t require much more work, but it does require the payroll professional to be attentive, Chong says.
"In order to prepare for a bonus run, payroll or the organization is going to have to communicate to the third party provider or in-house team to make sure that there’s coding all set up and that deductions are also set up to accommodate that bonus payment," she says.