There is no separate vacation pay tax rate in Ontario. Vacation pay is employment income, so it is taxed at the same federal and provincial marginal rates as your regular wages, with the same CPP and EI deductions applied.1Canada Revenue Agency. Vacation Pay and Public Holidays Payments What changes, and what usually surprises people, is how much tax gets withheld at the moment of payment. That depends on whether the vacation pay lands in a regular paycheque or arrives as a lump sum.
Why a Lump-Sum Payout Looks So Heavily Taxed
When your employer pays out vacation pay as a lump sum separate from your regular pay, the CRA requires payroll to use the bonus or irregular payments method for income tax withholding.1Canada Revenue Agency. Vacation Pay and Public Holidays Payments This is the calculation used when you cash out unused vacation, receive a year-end payout of accrued vacation, or get a vacation balance paid out when you leave a job.
The mechanics: payroll calculates the tax on your projected annual salary alone, then recalculates it with the lump sum added in, and withholds the difference. The effect is that the entire lump sum is taxed at your top marginal rate rather than being averaged across your lower brackets. For a worker earning $65,000 who receives a $2,600 vacation payout, combined federal and Ontario withholding on that payout can easily land around 30% or higher, even though the worker’s overall average tax rate is much lower.
This is where the frustration comes from. Your regular paycheque is withheld at a blended rate that reflects your lower brackets too, so seeing a payout taxed at your top rate feels like an overtaxation. It usually isn’t. Those extra dollars really do sit at the top of your income stack, and that’s the rate that applies to them. CPP contributions on lump-sum vacation pay use the same bonus method, while EI premiums are calculated the same way as on regular pay.1Canada Revenue Agency. Vacation Pay and Public Holidays Payments
The Federal and Ontario Brackets That Apply
Because vacation pay is ordinary employment income, your marginal rate on it is set by your total taxable income for the year. Ontario’s 2026 provincial rates are:
- 5.05% on the first $53,891
- 9.15% on income from $53,891 to $107,785
- 11.16% on income from $107,785 to $150,000
- 12.16% on income from $150,000 to $220,000
- 13.16% on income over $220,000
Ontario also applies a surtax on higher provincial tax amounts: 20% of provincial tax above $5,818, plus another 36% of provincial tax above $7,446. It doesn’t add a bracket, but it lifts the effective provincial rate for higher earners.
Federal rates sit on top, running from 15% on the lowest tier up through 20.5%, 26%, and 29%, and reaching 33% above the top threshold.2Canada Revenue Agency. Tax Rates and Income Brackets for Individuals A typical Ontario worker earning between $55,000 and $107,000 faces a combined marginal rate around 30% to 33% on each additional dollar. Vacation pay that pushes part of your income into a higher bracket is taxed at that higher rate, the same way overtime or a raise would be.
Vacation Pay Paid on Every Cheque
Some employers pay the 4% (or 6%, once you pass five years of service) on every paycheque instead of banking it.3Government of Ontario. Your Guide to the Employment Standards Act – Vacation For tax purposes this arrangement is simpler. The payroll system treats the vacation portion as part of your regular pay for the period and applies the standard withholding formula. There’s no bonus-method calculation because the payment isn’t irregular.
The tax impact spreads evenly across the year, which avoids the withholding sticker shock of a lump-sum payout. The trade-off is that you’ve already received the money, so time off later is typically unpaid unless your employer offers something above the ESA minimum.
CPP and EI on Vacation Pay
For 2026, the CPP employee contribution rate is 5.95% on pensionable earnings up to $74,600, after the basic exemption.4Canada Revenue Agency. CPP Contribution Rates, Maximums and Exemptions The EI premium rate is 1.63% on insurable earnings up to $68,900.5Canada Revenue Agency. EI Premium Rates and Maximums
If your regular paycheques have already pushed you past the annual CPP or EI maximum, no further premiums come off your vacation pay. That’s one reason a December payout can carry slightly lower total deductions than an identical payout earlier in the year. Payroll systems track year-to-date contributions automatically.
Vacation Pay When Your Job Ends
When employment ends for any reason, all accrued and unpaid vacation pay must be paid out, from the current entitlement year and any earlier years still owing. Payment is due by the later of seven days after your last day or your next scheduled pay date.3Government of Ontario. Your Guide to the Employment Standards Act – Vacation
A termination vacation payout is treated as a lump sum, so the bonus or irregular payments method applies for income tax withholding.1Canada Revenue Agency. Vacation Pay and Public Holidays Payments If your contract set a rate higher than the ESA minimum, the payout has to reflect that higher rate, not just the statutory 4% or 6%.
Getting Over-Withheld Tax Back
Lump-sum withholding is an estimate. Because the bonus method treats your top marginal rate as applying to the whole payout, it often takes off more than you actually owe, especially in a year when your income was lower than projected because of parental leave, a job change, or reduced hours.
The reconciliation happens on your annual return. The CRA calculates your real tax liability against your actual total income, and any excess withholding comes back as a refund. You don’t need a special form. Vacation pay is already included in the employment income box on your T4, and the standard return catches the overpayment. If you receive lump-sum vacation payouts routinely and get refunds year after year, you can file Form T1213 to ask the CRA to authorize reduced withholding at source. Most people just take the refund in the spring.