A Guide To Payroll Deductions for Employees and Employers
Before I started my own business, and despite my accounting background, I would receive a paycheque without really questioning or understanding the deductions. I simply had a sense that the deductions were very high and that my net pay was much too low compared to my gross pay. Once, I ventured into the arena of small business accounting, however, I had to learn how to create a paycheque and the accompanying year end slips (T4s and RL1). It was only then that the deductions started to make sense.
So, if you have ever been an employee in Canada, you have received a paycheque. The salary or hourly rate is decided upon by you and your employer. Your employer is then responsible for calculating the deductions required by Revenue Canada (and Revenue Quebec for QC based employees) and remitting them to the revenue agencies. They must also complete the T4s (and RL1s in Quebec) for the full year and give them to the employees by February 28th of the year following the year of employment (regardless of termination date during the year) and ensure that they give them to you so that you can complete your tax returns.
An employer in Canada is also responsible for paying additional amounts for every employee, based on the employee deductions. In other words, the employer adds up all the amounts that they deduct from employees PLUS specified other amounts and sends these to CRA.
Note: employees are different from subcontractors who are essentially small business owners and must report and pay their own taxes
As a small business employer, you must register for payroll so that you can remit the amounts owing to the revenue agencies.
Types of Salary/Payroll Deductions For Employee and Employer (Except Quebec)
For employers and employees across most of Canada, there are three main payroll deductions that must be accounted for:
Canada Pension Plan (CPP) Contributions
The Canada Pension Plan (CPP) while a deduction from your paycheque, is not a tax per se. It is a mandatory contribution to a retirement fund that you will be entitled to when you decide to retire.
Both employers and employees contribute to CPP, and the contributions are calculated based on the employee's earnings.
Employee Contributions: In 2024, this rate is 5.95% of the employee's salary up to $68,500 + an additional amount of 4% under the second tier of CPP from $68,500 to $73,200. The maximum salary upon which the contribution is based is $73,200 (no CPP contributions are taken on salaries above the maximum salary).
There is also a basic exemption of $3,500 so if you earn under $3,500 in a given year, you are not required to contribute to CPP.
Employer Contributions: Employers are required to pay the identical amount in addition to the amount paid by the employee.
Example: If an employee earns $50,000, the CPP deduction would be $50,000 minus the year's basic exemption ($3,500) multiplied by 5.95%. The employee and employer would each contribute $2,759. The calculation between $68,500 and $73,200 is at subject to a 4% deduction.
Employment Insurance (EI) Premiums
Employment Insurance (EI) is a program which compensates employees who have been laid off.
It also covers parental, sickness, and caregiving benefits.
If you own more than 40% of a corporation and draw a salary, then you are not required to contribute to EI nor are you eligible to claim benefits (since you can’t fire yourself).
Both employers and employees must contribute to EI.
Employee Contributions: In 2024, the rate is 1.66% of salary, with a maximum annual premium of $1,302.31.
Employer Contributions: Employers must contribute 1.4 times the employee’s contribution, which amounts to 2.324% of insurable earnings, with a maximum of $1,823.24.
Example: For an employee earning $50,000, the EI contribution would be $50,000 multiplied by 1.66%, leading to an employee contribution of $830. The employer would contribute $1,162 for that employee.
Federal Income Tax Deductions
Federal Income tax deductions are based on an employees total salary/earnings and can be modified, via a form TD1, to reflect other potential credits e.g. if you have a spouse that doesn’t work. The tax withheld from the employee’s paycheque is in some sense a down payment towards the income tax bill.
Employee Contributions: Employees pay federal income tax based on a progressive tax rate structure, that starts at 15% and increases as income rises.
Note the concept of marginal tax rates, whereby the higher tax brackets apply only to amounts that fall within that tax bracket. For example, lets assume you earn $51,000 and the tax brackets are 15% for income under $50k and 20% for income over $50k. Then only the $1,000 that is in excess of the $50k will be subject to the higher tax rate of 20%. This is referred to as a marginal tax rate.
Employer Contributions: Employers are not required to contribute income taxes in addition to what the employees pay.
Example: If you were to earn $50,000 in Ontario and had no other deductions or credits, your total deductions for 2024 would be approximately $10,000
I like to use this tax calculator. You can also check my short tutorial on how to calculate your taxes when you are self employed.
Types of Salary/Payroll Deductions For Employee and Employer for Quebec Only
Quebec Pension Plan (QPP) Contributions
Similar to the Canada Pension Plan explained above, Quebec operates its own pension program, with slightly higher rates, called the Quebec Pension Plan (QPP or RRQ in French).
Both employers and employees contribute to QPP, and the contributions are calculated based on the employee's earnings.
Employee Contributions: In 2024, this rate is 6.4% of the employee's salary up to $68,500 + an additional amount of 4% under the second tier of QPP from $68,500 to $73,200. The maximum salary upon which the contribution is based is $73,200 (no QPP contributions are taken on salaries above the maximum salary).
There is also a basic exemption of $3,500 so if you earn under $3,500 in a given year, you are not required to contribute to QPP.
Employer Contributions: Employers are required to pay the identical amount in addition to the amount paid by the employee.
Example: If an employee earns $50,000, the QPP deduction would be $50,000 minus the year's basic exemption ($3,500) multiplied by 6.40%. The employee and employer would each contribute $2,960.
Employment Insurance (EI) Premiums
These work exactly the same way as for the rest of Canada (above) and are remitted directly Revenue Canada (CRA).
Quebec Parental Insurance Plan (QPIP) Contributions
QPIP is a program that provides benefits for maternity, paternity, adoption, and parental leave for workers in Quebec. Both employers and employees are required to contribute to this plan. Also known as RQAP in French.
Employee Contributions: 0.494% of insurable earnings, up to a maximum of $453.46 annually.
Employer Contributions: Employers contribute at a higher rate of 0.692% of insurable earnings, with a maximum of $635.94.
Example: An employee earning $50,000 would contribute around $247 to QPIP, and the employer would contribute about $346.
Quebec Income Tax Deductions
Quebec Income tax deductions are in addition to the Federal income taxes withheld. If you are in Quebec, your federal taxes withheld will be lower, which would be offset by an additional contribution for Quebec income taxes. This is purely a employee contribution. Employers are only required to remit these amounts to CRA and RQ.
Quebec Health Services Fund (QHSF)
The QHSF is the provincial health plan (also known as Fonds des services de santé or FSS). Only employers are required to contribute to this plan on rate which is determined by their total salaries. If your total payroll is less then $1million, then the rate is 1.65%. If it exceeds $1 million, then the rate is calculation which can be found here.
Remittances To Revenue Canada (Except Employer in Quebec)
You must deduct amounts indicated above and send them to CRA, usually on a monthly basis (CRA will let you know). You can use various payroll services to do this or you can do it yourself. Check out my blog post that lays out the options for doing your Canadian payroll.
The total amounts that you are required to send to Revenue Canada are:
CPP deducted from Employee +
CPP Paid By Employer+
EI deducted from Employee +
EI Paid By Employer+
Federal Income Tax =
Total Remittance to CRA
Remittances To Both Revenue Canada and Revenue Quebec (for employers in Quebec)
In Quebec, you are required to send payroll deductions to both CRA and RQ, separately.
The following are the amounts to be included in the remittance:
Remittance to Reveue Canada
EI deducted from Employee +
EI Paid By Employer+
Federal Income Tax
= Total Remittance to CRA
Remittance to Revenue Quebec
QPP deducted from Employee +
QPP Paid By Employer+
QPIP deducted from Employee +
QPIP Paid By Employer+
Quebec Income Tax+
QHSF
= Total Remittance to RQ
Whether or not you are doing your own payroll or outsourcing it, I think it is important to understand how payroll works and your related obligations. It can seem a bit confusing, but once you know what each deduction represents it starts to make a lot more sense.
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