While bonuses can be an effective way for employers to motivate certain behaviours or outcomes, they don’t provide any tax advantages to employees compared to a traditional salary.Inside Creative House/iStockPhoto / Getty Images
While base pay is the most common form of compensation, employers can look for other ways to motivate employees, improve retention or attract new staff, particularly during economic shifts.
“It goes back to what type of behaviour you’re trying to entice from your team or your employees,” says Andrew Caldwell, an advisory manager for HR consulting firm Peninsula Canada. “You hit a point where you can’t just keep raising people’s salary, and if you need to keep them but you just don’t have the funds to do it, you need to find another way to keep them while giving them some type of incentive.”
One of the most common alternative forms of compensation, according to Mr. Caldwell, is bonus pay. Bonuses can be provided for a range of purposes, such as performance bonuses, which are offered in exchange for achieving specific objectives, and signing bonuses, which are offered to new hires upon signing their employment contract.
“A bonus could be there to say, hey, let’s see a bit more drive, let’s hit these targets, and here’s a bonus if you make it,” Mr. Caldwell says.
While bonuses can be an effective way for employers to motivate certain behaviours or outcomes, they don’t provide any tax advantages to employees compared to a traditional salary.
One form of compensation tied to performance that provides some tax advantages is commission, which is given to individuals or teams based on a portion of the proceeds from each deal they close.
“You want people who are hungry to go out and make your sales, and that’s how you get the commission intake,” Mr. Caldwell says. “That’s the biggest bang for your buck in that [sales] role.”
Unlike bonuses, those who earn a commission as part of their compensation enjoy certain tax advantages. Specifically, they can write off various business-related expenses, such as home office expenses, insurance, training costs and professional licensing fees.
“There’s more that you can write off than a regular employee,” says Hanna Roohi, a partner at Roohi CPA LLP. “If you’re on a commission income, assuming you meet certain criteria, you want to get a T2200 form signed right away and have an idea of what you can write off.”
Employers seeking to incentivize or retain employees who don’t qualify for bonuses or commission might want to consider offering a retirement benefit.
According to Ms. Roohi, the two most common forms of retirement contributions in Canada are Registered Retirement Savings Plan (RRSP) contributions and Registered Pension Plan (RPP) contributions.
She explains that RRSP contributions are tax exempt until they are withdrawn, and some employers offer RRSP matching programs to help staff with retirement savings. Meanwhile, others assist their staff with retirement savings by setting up a pension plan they can cash out upon retirement.
The two most common types of pension plans in Canada are defined benefit RPPs – which guarantee staff a specific amount each month upon retirement, typically based on years of service and seniority – and defined contribution RPPs, which are tied to the market, Ms. Roohi notes.
“Your employer will put funds into this plan, and whatever the investment manager generates, that’s what your retirement plan will be,” she said, adding that defined contribution RPPs tend to be more common. “If it goes up, you get more; if it goes down, you get less.”
Like RRSPs, RPPs are exempt from taxes; however, unlike RRSPs, the funds can’t be withdrawn before retirement.
Another category of compensation that goes beyond base pay is tied to the business’s performance and typically comes in the form of stock options for public companies and profit sharing for privately owned companies. In both circumstances, employees are invited to share in the business’s success with the hope that it incentivizes better performance.
“There’s different kinds of profit-sharing plans, and usually in a profit-sharing plan there is a trust that is administering your earnings,” says Yannick Lemay, a senior tax expert for H&R Block. “Every year, this trust is distributing to employees the profits it is making, and they will be taxed annually on their share of those profits.”
While profit sharing is typically administered by a trust, stock options require employees to buy what essentially amounts to discounted shares in their employer. Unlike profit sharing, employees are taxed on the shares they purchase in the tax year in which they are acquired. Employees can then sell those shares once the stock price goes up.
“When you sell the shares, you will be taxed at a capital gain rate, which is usually a lower rate than your salary,” Mr. Lemay says. “At this moment, only 50 per cent of capital gains are included in your taxable income so, in the long run, you should keep those shares long enough to realize that gain, then you will pay less taxes on that money than you would on the equivalent amount of wages.”