I work in a profession where my bonus is a small set amount and isn’t guaranteed (you have to qualify for it). I really look forward to earning the bonus and have to work pretty hard to get it. So why are bonuses taxed when I already have my regular salary chopped up? It’s pretty disheartening to see this small amount reduced after earning it.
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In Canada we use the magic word “source”. That means a source of income that is predictable – it’s actually pretty complicated, but we’ll leave it there. So employment is a source, and the money you receive under an agreement is taxable.
In Canada, windfalls are not taxed. So lottery winnings are not taxed. If an employee gets a bonus that is strictly from the boss’s generosity, that is not taxable. When the bonus comes from a set formula, and you could sue for it if you get it, that is income from a source.
Our Income Tax Act has a “screw you” provision called the General Anti-Avoidance Rule which lets CRA come after you if you try and get tricky. Another commenter made a great analogy, $1 salary and $1M bonus. You can look forward to a visit to Tax Court and lawyers fees.
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