Paying Lump Sum over Multiple Payments: Bonus Method vs Lump Sum Tax

GOAL: To provide a wholistic overview of the different taxation implications that can occur when paying a lump sum payment (Such as MATTOPUP) over multiple Payments – in this case 2 Pay Periods. 

 

PROCESS OVERVIEW

ISSUE: Employee is not getting taxed on Lump Sum Payment for MATTOPUP while the Employee is on Mat Leave. 

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IMPORTANT NOTE: MATTOPUP of 2,568.13 paid out twice. One in previous PP, and again in the current Pay Period = 202602. 

This breaks an important distinction between the 2 different Other Tax Gross calculation methods. 

  1. Bonus Method
  2. Lump Sum

Since there are now 2 payments of MATOPUP broken up into multiple pay periods (202601 and 202602) this is no longer considered Lump Sum and is now considered Bonus Method. 

  • Now the system will analyze tax normally and try to annualize income in this calculation

 

PAYROLL > PAY PROCESS > YTD RECORD ADJUSTMENT > EID/EMP_GROUP/2025

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**Entity Code = 202601 constitutes a Tax Reset on this pay period**

This is due to $1.61 of REG_TAX_GROSS in 202601 after missing Pay Periods, which will always trigger a tax reset. 

 

Important Note: Once a Tax Reset is triggered, the system will ignore YTD values. 

In this case all the system has to go on is the 2 Payments of 2,568.13 for a total of 5,136.26, and no projected earnings since the Employee is on Leave. 

Assumption: Employee is on Leave; hence the Mat Pay Top Up payments. No other earnings forecasted. 

 

PAYROLL > PAY PROCESS > TAX ANALYZER > SAMPLE EID/EMP_GROUP > SUBMIT

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**Note the small amount of Reg Gross from YTD (202601) which has triggered the Tax Reset**

 

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**Here the system projects 5,110.08 Annualized Income in Pass 1**

 

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**Here the system projects 2,566.19 in Annualized Income under Pass 2**

 

IMPORTANT NOTE: Because the Annualized Income under Pass 1 & 2 is less than the Basic Personal Tax Credits shown below, the system is not taxing the earnings as it is unable to forecast enough earnings to trigger OTHER_TAX in the Bonus Method. 

 

 

 

Helpful Resources:

CRA Calculate Income Tax Deductions: Calculate income tax deductions - Canada.ca