What’s the cheapest way to give an employee a raise?

Most owners reach for a salary bump or a bonus because that’s what feels generous. They’re the two most expensive ways to put money in someone’s pocket. Here’s the math most owners never run.

The setup

An employee in BC earns $70,000. You want to give them $5,000 more this year. You have three ways to deliver it. All figures use 2025 rates and are rounded.

Route 1: salary (or a bonus)

At $70,000 the employee has already passed the 2025 EI ceiling, so EI adds nothing. But the raise crosses the CPP ceiling, so you pay about $225 of employer CPP on it, not a flat 5.95%. The employee then pays income tax at a combined federal and BC rate of 28.2% on this slice, plus their own CPP of about $225.

• Cost to you: about $5,225
• Lands in their pocket: about $3,400

Roughly a third never reaches them. A bonus works the same way, just once.

Route 2: Group RRSP match

A Group RRSP match still counts as pensionable pay, so you pay the same $225 of CPP. The difference is on the employee’s side: the $5,000 goes into their RRSP, and the RRSP deduction offsets the tax. The full amount is invested for them, tax deferred.

• Cost to you: about $5,225
• Working for them: $5,000, tax deferred

Route 3: DPSP contribution

No CPP, no EI, fully deductible. The employee isn’t taxed until they withdraw it. If they’re within their first 24 months of plan membership, it also vests over that period.

• Cost to you: $5,000
• Working for them: $5,000, tax deferred

Three price tags

What changes at other incomes

Below the 2025 EI ceiling of $65,700, salary also attracts employer EI of about 2.3%, and the full CPP rate of 5.95% applies. That widens the gap in the DPSP’s favour. At higher incomes, above both CPP ceilings, the payroll tax difference shrinks, but the employee’s tax saving remains.

The catches, stated plainly

• Deferring tax is not the same as avoiding it. The employee pays tax when they withdraw, ideally in retirement at a lower rate.
• The money is for retirement. If an employee needs cash this year, a raise is what helps them.
• A DPSP requires company profits, current or accumulated.
• Owners who hold 10% or more of the shares can’t receive DPSP contributions. Rules in Group RRSP vs. DPSP.

The payroll tax side is explained in more detail in CPP and EI on group plan contributions.

Hypothetical illustration using BC and federal 2025 rates: YMPE $71,300, second CPP ceiling $81,200, employer and employee CPP 5.95% and 4% (second tier), EI maximum insurable earnings $65,700, combined federal and BC marginal rate of 28.2% at this income. Amounts are rounded. Actual amounts vary by province, income, year and personal situation. General information, not tax advice.

Common questions

What is the cheapest way to give an employee a raise in Canada?
Usually a DPSP contribution. It is fully deductible to the business and not subject to CPP or EI, and the employee receives the full amount tax deferred.

Does a bonus cost less than a salary increase?
No. A bonus attracts the same income tax and payroll costs as salary. It is simply paid once instead of every year.

How much of a raise does an employee actually keep?
It depends on income and province. In a BC example at $70,000 using 2025 rates, about $3,400 of a $5,000 raise reached the employee after income tax and CPP.

Is a Group RRSP match cheaper than a salary increase?
For the employer, the cost is about the same because CPP applies to both. For the employee, the match is worth more because the full amount is invested tax deferred instead of being taxed now.

Are there downsides to paying employees through a DPSP?
Yes. The money is for retirement, not immediate spending. Withdrawals are taxable. The company must have profits, and owners with 10% or more of the shares cannot participate.