As year-end approaches, employers often receive requests from employees asking whether a bonus can be directed into an RRSP rather than paid through regular payroll. While this may appear to be a simple administrative preference, it engages statutory obligations under the Employment Standards Act, 2000 (“ESA”), as well as payroll and reporting considerations.
Treating the issue solely as a payroll adjustment risks overlooking important compliance requirements.
When Is a Bonus Considered “Wages” Under the ESA?
The analysis begins with the definition of “wages” under the ESA. The Act defines wages broadly as monetary remuneration payable under an employment contract. It excludes only gifts or bonuses that are entirely discretionary and not related to hours, production, or efficiency.
In practice, most performance-based or earned bonuses will fall within the definition of wages. Where a bonus is tied to contractual terms, measurable targets, or an established incentive program, it is generally treated as wages for ESA purposes. Once characterized as wages, the employer must comply with the ESA’s rules governing deductions, payment timing, and record-keeping.
Written Authorization and Deductions
Section 13 of the ESA restricts deductions and withholdings from wages. An employer may not withhold wages or make deductions unless authorized by statute, court order, or the employee’s written authorization.
A request to transfer a bonus directly to an RRSP is, in substance, a redirection of wages. Employers should therefore obtain clear written authorization before processing such a request. Absent written authorization, the bonus must be paid in the ordinary course.
From a risk management perspective, treating RRSP redirection as requiring written authorization is consistent with the ESA’s protective framework and helps avoid disputes over improper wage deductions.
Timing of Payment
The ESA also regulates when wages must be paid. Section 11 requires employers to establish a recurring pay period and pay wages earned in that period no later than the regular pay day.
An employer cannot delay payment of a bonus while waiting for RRSP instructions. If a bonus is payable in December, it must be paid on the established pay date, whether in cash or through a properly authorized RRSP contribution. Clear communication of payroll cut-off dates is therefore essential to ensure wages are paid within the required timeframe.
CRA and Payroll Considerations
Once ESA requirements are satisfied, income tax treatment is governed by the Income Tax Act and accompanying guidance from the Canada Revenue Agency. The tax consequences may differ depending on whether the bonus is paid directly to the employee or contributed to an RRSP through payroll. Employers should ensure that withholding and reporting are handled in accordance with current CRA guidance and confirm their approach with payroll advisors where necessary.
Employees remain responsible for confirming their available RRSP contribution room under the Income Tax Act. Employers are not required to determine whether an employee has sufficient contribution room, but may wish to remind employees to verify this before submitting a redirection request.
Record-Keeping
The ESA requires employers to maintain records of wages and deductions. Written authorizations to redirect bonuses, payroll records reflecting the gross bonus amount, and documentation of amounts remitted to an RRSP should be retained in accordance with the ESA’s record-keeping requirements. Proper documentation will be important in the event of an inspection or wage complaint.
Practical Considerations
Employers who anticipate year-end RRSP requests may wish to implement clear internal processes. Providing a standard RRSP direction form in advance of year-end payroll processing can help ensure written authorization is obtained in a timely manner. Establishing firm payroll deadlines reduces the risk of delayed wage payments.
It is also prudent to review employment agreements and incentive plans to ensure they clearly distinguish between discretionary and earned bonuses. Ambiguity in bonus language can create unintended entitlements. Managers should be reminded not to make informal promises that alter the contractual nature of a bonus.
Conclusion
Redirecting a year-end bonus to an RRSP is not merely a payroll preference. It intersects with statutory wage protections, deduction rules, payment timelines, and record-keeping obligations under the ESA.
Handled properly, such requests can be accommodated without difficulty. By obtaining written authorization, paying wages on time, maintaining appropriate records, and confirming payroll compliance, employers can support employee financial planning while remaining aligned with their statutory obligations.
About the Author
Mariya is a Student-at-Law with Global Asset Management team, Legal and Regulatory Compliance at BMO Financial Group.
Any article or other information or content expressed or made available in this Section is that of the respective author(s) and not of the OBA.