Bonus to Your RRSP From Your Corporation: Withholding Rules

Can my corporation pay a bonus into my RRSP without withholding tax?

Generally yes for income tax, on the part you can deduct for the year. A corporation does not withhold income tax on pay it puts into an employee's RRSP when it has reasonable grounds to believe the employee can deduct that amount for the year (CRA benefits chart; Income Tax Regulations, section 100). The bonus is still your income. It goes on your T4, and the RRSP deduction on your return offsets it.

The CRA generally accepts that the corporation has reasonable grounds if you confirm the contribution is deductible for the year, or if it holds a copy of your RRSP deduction limit statement from your notice of assessment (CRA benefits chart). Only income tax is skipped. CPP is generally still deducted, and EI is too unless the pay is not insurable.

For a contribution withheld from your bonus and sent to the plan, Regulation 100(3)(c) sets no condition on withdrawals. For a contribution made from the corporation's own money, the CRA's chart puts the exception under its cash option, for contributions the employee can withdraw. A group RRSP the employee cannot withdraw from is non-cash, so confirm before relying on the exception for one. If the bonus is paid to you in cash and you deposit it yourself, income tax is withheld as on any other bonus; an employee who makes deductible RRSP contributions can ask the CRA to approve less withholding with Form T1213 (CRA payroll guide).

A case is not simple if any of these is true:

• You have little or no RRSP room, for example after a year paid only in dividends or a year with no earned income.
• The corporation has no payroll account yet.
• Your employment is in Quebec.
• The corporation's profit is above the small business limit, so the bonus has another job to do. See bonusing profit down to the small business limit.

Then the amount, the pay mix and the dates have to be worked out before any money moves. Gather your latest notice of assessment (or the limit shown in My Account), the corporation's payroll account number, the pay already made this year and the RRSP issuer's account details.

How much can I put into my RRSP without going over my limit?

The no-withholding relief covers a contribution up to the RRSP deduction limit for the year, and no further. The limit is on your latest notice of assessment or reassessment, on Form T1028, or in My Account (CRA Guide T4040).

The limit is unused room carried forward, plus new room from last year's earned income, adjusted for any pension adjustment (the value of pension benefits earned through an employer plan). New room is the lesser of the dollar limit for the year ($33,810 this year) and 18% of last year's earned income (Income Tax Act, section 146; CRA: registered-plan limits). Subtract contributions already made and not yet deducted, including earlier payments this year. The same limit applies if the money goes to a spouse's or common-law partner's RRSP instead (CRA payroll guide).

Room is not the only gate. Contributions to your own RRSP must be made by December 31 of the year you turn 71 (CRA: deduction limit). After that, unused room can still support contributions to a spouse's or common-law partner's RRSP until the end of the year that partner turns 71.

The relief is tied to the year the bonus is paid, so use that year's limit (Income Tax Regulations, section 100).

Money beyond your limit has no deduction behind it, so the corporation must withhold on that part. A person who fails to withhold what was required faces a penalty of 10% of the amount not withheld, or 20% for a repeat failure in the year made knowingly or through gross negligence (Income Tax Act, section 227). Directors are also jointly liable with the corporation for tax it failed to withhold, with its interest and penalties, subject to collection conditions and a due-diligence defence; recovery cannot start more than two years after the director last ceased to be a director (Income Tax Act, section 227.1; Canada Pension Plan, section 21.1). See also payroll for an owner who is the only employee. You also owe a tax of 1% a month on contributions more than $2,000 over your limit (CRA: deduction limit). For the penalty and the T1-OVP, see RRSP over-contribution.

Does this year's bonus create RRSP room this year?

No. A bonus builds room for next year. New room for a year is the lesser of 18% of the previous year's earned income and that year's dollar limit, which is $35,390 for next year (Income Tax Act, section 146; CRA: registered-plan limits).

Employment income counts in the year you receive it (CRA: bonuses). A bonus paid by December 31 counts toward this year's earned income, and one paid in January toward the next year's.

Dividends are not earned income, so a year paid only in dividends adds no room (Income Tax Act, section 146). For how much pay builds how much room, see salary for RRSP room and CPP.

Are CPP and EI still deducted from a bonus paid into my RRSP?

CPP is generally still deducted, up to the yearly maximum. EI is deducted when the employment is insurable. The CRA lists bonuses among the pay CPP applies to, and its chart has the corporation deduct CPP whether the RRSP contribution is a cash or a non-cash benefit (CRA: CPP; CRA benefits chart).

CPP stops once the employee's contributions for the year reach the maximum; the pay ceilings are in salary for RRSP room and CPP (CRA: CPP rates; CRA: CPP2 rates). Once this corporation has deducted the yearly maximum of CPP and second additional CPP (CPP2) from your pay, it deducts no more on the bonus (CRA payroll guide). Amounts another employer deducted do not count toward that maximum (CRA: CPP). Otherwise the corporation deducts your share and adds its own matching share. If the whole bonus goes to the RRSP, there is no cash pay to deduct your share from, so decide beforehand where it comes from.

CPP is not owed at every age. Pay is excluded after you turn 70. From 65 to 69, if you receive a CPP or QPP retirement pension, you can elect to stop contributing on Form CPT30, which takes effect the first day of the month after you make it and cannot be revoked in the same year (Canada Pension Plan, section 12; CRA: CPP). See payroll for an owner who is the only employee.

An owner who controls more than 40% of the voting shares has employment that is not insurable, so no EI applies. Employment between related people who are not dealing at arm's length may also be not insurable (CRA: pensionable and insurable employment). For anyone else, EI follows the same cash test: the CRA words it for a group RRSP, and a contribution the employee cannot withdraw has no EI (CRA benefits chart). It does not say how the test applies to an RRSP held alone; one you can withdraw from freely points to the cash case, so confirm it.

How does the bonus show on my T4 and my tax return?

The T4 shows the full amount as employment income, and you deduct the RRSP contribution on your return. How the T4 reports it depends on how the money reaches the RRSP.

A contribution withheld from your own pay is not a taxable benefit, so it adds nothing beyond the bonus itself. The CRA's benefits chart sets out the code 40 treatment and that rule; its bonus page gives the box 14, 24 and 26 reporting for any bonus. The taxable-benefit rule is Income Tax Act, section 6.

On your return, the bonus is part of employment income, and you claim the RRSP deduction on line 20800, with Schedule 7 where it applies (CRA: line 20800). Keep the RRSP issuer's receipt with your payroll records. The deduction cannot exceed your limit, whatever the corporation withheld.

What does the corporation deduct, and when?

A corporation can deduct a bonus as a salary expense for the year it is incurred, as long as the amount is reasonable (Income Tax Act, section 67). The corporation's matching CPP share is a further payroll cost on top of the bonus.

A bonus accrued at the corporation's year-end is deductible for that year only if it is paid within 180 days after the year-end; otherwise in the year of payment (Income Tax Act, section 78). The corporation's year and your year can differ: an accrued bonus is not your income, and cannot go into your RRSP, until it is paid, and you are taxed, get a T4 and build room in the calendar year you are paid (CRA: bonuses). For accruing a bonus to reduce profit, see bonusing down to the small business limit.

Do I need payroll set up before I can pay a bonus into my RRSP?

Generally yes. A bonus is pay to an employee, so the corporation usually needs a payroll program account. It then deducts, remits and reports on a T4. A business that pays bonuses to employees is an employer and must register before its first remittance due date (CRA: register for a payroll account). A corporation that already has a business number adds the payroll account to it (CRA payroll guide).

An owner who has taken only dividends may have no payroll account, so the first bonus starts the clock. See running payroll and payroll for an owner who is the only employee.

Does Quebec work the same way?

Not necessarily. An employer with employees in Quebec deducts QPP instead of CPP, and sends QPP, QPIP and Quebec income tax deductions to Revenu Québec, not the CRA (CRA payroll guide). Quebec income tax withholding follows Revenu Québec's rules.

This page sets out only the federal rule for RRSP contributions, and it does not state Quebec's. Confirm Quebec's rule before skipping Quebec income tax withholding on a bonus paid into an RRSP.

Example

These examples are illustrative and use Canadian dollars. Each assumes a corporation with a payroll account and an owner with no pension adjustment.

Room covers the bonus

An owner has C$25,000 of RRSP room on her notice of assessment and confirms to the corporation that she will deduct the contribution. Her pay from this corporation this year already reached the CPP and CPP2 maximums, so no more CPP is due on the bonus. She is under 71. She controls more than 40% of the votes, so no EI is due either. In December the corporation pays a C$20,000 bonus into her RRSP and withholds no income tax. Her T4 shows C$20,000 of employment income. She deducts C$20,000 on her return, so the two offset. The corporation deducts C$20,000 as salary. She has C$5,000 of room left, and the bonus adds room for next year, not this year.

The payment is bigger than the room

An owner has C$8,000 of room, and the corporation wants to put C$20,000 into her RRSP. The no-withholding rule fits only the first C$8,000. The other C$12,000 has no deduction behind it, so the corporation can pay it to her as ordinary pay with income tax withheld. Whatever part of it still ends up in her RRSP is over her limit and can attract the monthly excess-contribution tax; see RRSP over-contribution.

Dividends last year, a bonus this year

An owner took only dividends last year, with no other earned income, and has no unused room from earlier years. Last year's dividends added no room for this year. This year the corporation pays a C$20,000 bonus by December 31, which counts as this year's earned income. It creates 18% of that, C$3,600, of room for next year. This year she has no room, so a C$20,000 payment into her RRSP now has no deduction to support skipping withholding.

Different for you?

• You have little or no room, or took only dividends last year: a bonus builds next year's room, not this year's. See salary for RRSP room and CPP. The amount and the mix of salary, bonus and dividend need settling before year-end: corporate tax help.
• The corporation has no payroll account: register before the first bonus. See running payroll and payroll for an owner who is the only employee, and get the account and the timing against year-end checked.
• Your employment is in Quebec: QPP, QPIP and Quebec income tax change the deductions and are not covered here. Have the Quebec position confirmed before the first payment.
• The corporation's profit is above the small business limit: see bonusing down to the small business limit, then check the whole plan.
• You are weighing salary against dividends, or how much to take at all: see salary or dividends and how much to pay yourself. To set the mix for your numbers, see corporate tax help.
• You are a US citizen or green card holder living in Canada: the US side of a Canadian RRSP is covered in Canadian registered accounts on a US return. For both returns together, see cross-border tax help.
• You already put more into your RRSP than your limit: see RRSP over-contribution. If a T1-OVP is missing for earlier years or the CRA has written to you, bring it to individual tax help.