When a Bonus Comes with a Tax Bill

Geoff Currier

You probably don’t have any clients who have received a US$12.25 bonus. But that’s what Toronto Maple Leafs star John Tavares received when he signed with the club. In August, Tavares appeared  in court, to fight  an $8 million tax bill.  $1.2 million of that amount is interest which CRA says he  owes.

While the amount might be smaller than an NHL player’s bonus, you may have clients who receive bonuses as a part of their income. The Tavares case serves as a cautionary tale for those clients, and offers a timely reminder of the tax treatment of bonuses and other employment incentives.

It’s Income: Employers must report bonuses on their employee’s T4 slip as employment income. If there is a retroactive pay increase it is also reported. For your clients who are in sales or other positions where bonuses are a part of their employment agreement, it’s critical that you remind them of the importance of proper reporting. If the employer fails to include the bonus on the T4 slip, your client is not off the hook. 

The Dispute: In the Tavares case, the CRA argues that the bonus should be counted as employment income and taxed accordingly. Tavares counters by saying he was a U.S. resident and the bonus was an inducement and therefore should be taxed at the lower 15% rate. It will be worth keeping an eye on this case for those of you who have clients who do business in both Canada and the U.S.

Even if your client’s employer has included a bonus on the T4 slip and has calculated the tax to be deducted, it still falls to you as the person preparing the return to check the CRA tables to ensure that the correct amount has been deducted. The employer must also have deducted CPP and E.I. premiums from the bonus income. 

Relocation Incentives: If you have clients who have been paid incentives to relocate to a more remote area, such as the case with some doctors or nurses, they may not know that the money they were paid to relocate is considered taxable income. If the deductions are not made at the source, they may get a T4A slip from the employer.

If they are provided with moving expenses, that money is considered a condition of employment and generally is not taxable. It’s important to let your clients know what is and what is not taxable income.

Some Tax Tips for Clients: If your client is concerned about losing too large a portion of the bonus, there are always avenues to shield that money from CRA. You can advise your client to use their RRSP contribution room or to put some of the money into a TFSA to avoid taxes in future.

If your client has overpaid taxes on a bonus and receives a refund, it is an excellent opportunity for them to place that money in a registered account. The goal for you as the person preparing the return is to make sure your client doesn’t owe CRA because the amount dedicated by the employer was insufficient.

Until a decision in the Tavares case is reached, the CRA will regard inducements as a part of your client’s taxable income.

Communication is always the key. Make sure you are familiar with any bonuses your clients have been paid over the course of the year.

Here is some basic information from CRA on bonuses and retroactive pay increases. 

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/income-tax/increas

Finally, invite your clients to listen to Real Tax News with Evelyn Jacks and Friends to understand their tax system better. Go to learn.knowledgebureau.com/courses/real-tax-news-podcast