HR glossary · Pay and payroll

Retroactive pay

Retroactive pay is money owed for past pay periods, such as a raise that takes effect from an earlier date or a correction to underpaid wages.

Also called: retro pay, back pay, retroactive wage increase, retroactive adjustment

What retroactive pay means

Retroactive pay, or retro pay, is pay you owe for work already done in past pay periods. It comes up when a raise is backdated, when a new minimum wage rate was missed on payroll, or when you find you underpaid someone, for example by missing overtime.

It is different from a bonus. Retro pay corrects or completes what the employee was owed for specific past periods, so it should follow the same rules as the original pay: the same overtime, vacation pay and deductions.

Handling it correctly matters for the employee's tax, for your CRA reporting and, if the retro pay corrects an underpayment, for meeting employment standards.

How it works

Work out the difference for each past pay period. Multiply the extra hourly amount by the hours worked in each period, including overtime hours at the overtime rate. Add vacation pay on the extra amount if the employee's vacation pay is paid as a percentage of wages.

Pay it as soon as you can, through payroll, as a separate line on the pay statement so the employee can see what it covers. Retro pay is employment income, so payroll deductions apply. Check the CRA's employer guide or your payroll software's retroactive pay setting for how to calculate the tax, rather than simply adding it to one pay as ordinary wages.

If the retro pay covers an earlier calendar year, check the CRA's guidance on which year's T4 it belongs on before you prepare your slips.

If an employee has already left, retro pay can still be owed. Check whether their Record of Employment needs to be amended, since their earnings have changed.

Is it the same in every province?

The idea of retroactive pay is the same everywhere. Employment standards in each province decide whether retro pay is owed (for example, after a missed minimum wage increase), and the CRA's rules on deductions and reporting apply across Canada.

Example: A missed minimum wage increase

Ellie runs a 6-person ice cream shop in Summerside, Prince Edward Island. Two of her part-time staff were at the minimum wage, which rose to $17.30 an hour on 1 October 2026. Her payroll software was not updated, so they were paid the old rate for two biweekly pays.

When Ellie notices in November, she works out the difference for every hour each employee worked since 1 October, adds their vacation pay percentage, and pays it on the next pay day as a separate retro pay line, with the usual deductions. She also adds 1 April 2027, when the rate goes to $17.60, to her calendar.

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Questions about retroactive pay

Is retro pay taxable?

Yes. Retroactive pay is employment income. Check the CRA's employer guide or your payroll software for how to calculate the deductions on it.

Do I owe vacation pay on retro pay?

If vacation pay is a percentage of the employee's wages, the extra wages are part of that base, so add vacation pay on the retro amount.

How fast must I pay retro pay?

Pay it as soon as possible. If it corrects an underpayment, the wages were already owed on the original pay days.

Official sources

General information for Canadian employers, not legal advice. Rules differ by province and territory and change over time, so check with your provincial employment standards office (or the federal Labour Program if you are federally regulated) before you rely on it. See employment standards by province.

Checked against official sources on 4 November 2026.