Payroll deductions are a core part of running payroll in Canada. For most employees, these deductions include income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) contributions. These amounts are automatically withheld from each paycheque and help fund essential government programs such as retirement benefits and income support.
For employers, getting payroll deductions right is a statutory obligation. Errors in calculation or remittance can result in penalties, interest, and compliance issues. For employees, understanding these deductions helps them interpret their pay stubs and better understand the benefits they’re entitled to.
In this guide, we’ll walk through how payroll deductions work in Canada, what needs to be withheld, and how to stay compliant.
Who is required to make payroll deductions in Canada?
In Canada, any employer who pays employees is generally required to make statutory payroll deductions. This includes employers who pay salaries, wages, commissions, bonuses, tips, or provide taxable benefits to employees.
These obligations apply to both Canadian resident and non-resident employers, as long as the employment income is paid to employees working in Canada.
Employers must deduct and remit these amounts to the Canada Revenue Agency (CRA). In Quebec, payroll deductions are typically remitted to Revenu Québec for employees reporting to a place of business in the province.
Self-employed individuals are not subject to payroll deductions in the same way as employees. Instead, they are responsible for calculating and paying their own income tax and Canada Pension Plan (CPP) contributions when filing their personal tax returns.
Requirements before making payroll deductions
Before a company can legally deduct and remit payroll amounts in Canada, it must first be properly registered with the Canada Revenue Agency (CRA). There are two key requirements:
- A 9-digit Business Number (BN), which identifies the company with the CRA
- A payroll program account (RP account) provided by the CRA, which is used specifically for payroll deductions and remittances
The payroll account is created under the business number (e.g., 123456789 RP0001) and allows employers to remit deductions such as income tax, CPP, and EI. The CRA provides detailed guidance on how to register for a payroll account and begin making remittances.
Employers must also collect certain information from employees before running payroll. This includes:
- The employee’s Social Insurance Number (SIN)
- A completed TD1 federal form and, where applicable, a provincial TD1 form, which determine the amount of income tax to be deducted
- Banking information for direct deposit (if applicable)
The SIN is required to report income and deductions to the CRA, while TD1 forms are used to calculate the correct amount of income tax to withhold from each paycheque.
Can employers be exempted from making payroll deductions?
In most cases, employers in Canada are required to withhold and remit payroll deductions. However, there are limited situations where withholding requirements may be reduced or modified, typically with approval from the Canada Revenue Agency (CRA).
In certain cases, employers may apply for a Regulation 102 waiver, which allows them to reduce or eliminate income tax withholding on payments made to non-resident employees working temporarily in Canada.
These waivers are not automatic and must be approved by the CRA. They are typically granted when the employee is exempt from Canadian income tax under a tax treaty between Canada and another country.
There are also situations where EI premiums may not be required, depending on the nature of the employment relationship. For example, employment involving family members may be exempt if the relationship is determined to be non-arm’s length, although this is assessed on a case-by-case basis.
Certain types of workers such as barbers, hairdressers, taxi drivers, and other passenger-carrying drivers are subject to special payroll rules. While deductions may still apply, the calculation and remittance process can differ depending on the classification of the worker.
What are the statutory payroll deductions in Canada?
In Canada, employers are required to withhold certain payroll deductions - known as statutory deductions - from each employee’s pay. These deductions must be calculated and remitted to the government on a regular basis.
Pay frequency (e.g., weekly, biweekly, semi-monthly, or monthly) is determined by the employer, but statutory deductions must be applied to every pay period.
Broadly, payroll deductions fall into two categories:
- Statutory deductions (required by law)
- Voluntary deductions (e.g., benefits premiums, retirement contributions)
We'll first look at statutory deductions.
Income taxes
Taxes are an inescapable part of life, unfortunately. In Canada, both federal and provincial income taxes are deducted from employee gross pay during payroll. Federal taxes in Canada work similarly to federal taxes in the US. There are various tax brackets with tax rates that increase as taxable income increases.
Provinces have a varying number of brackets and a range of different marginal tax rates. Payroll tax deductions are made based on where the employee reports for work, while what an employee owes in income taxes at the end of the year is based on where they live.
For example, if an employee lives in British Columbia and works remotely for a company in Ontario, the employer will make payroll tax deductions based on Ontario income tax rates. At the end of the year when the employee files their income taxes in British Columbia, the employee will owe taxes to the government of British Columbia based on British Columbia income tax rates. This may result in either a tax refund, or additional taxes owing, depending on the difference between taxes deducted and taxes owed.
Canada Pension Plan (CPP)
The Canada Pension Plan (CPP) is a part of the public Canadian retirement system. Each pay period, employers must deduct a portion of an employee's gross pay, up to an annual maximum, and remit it to the CRA. Employers must also contribute an equal amount each pay period that is remitted to the CRA.
In Quebec, instead of deducting and paying CPP, employers deduct QPP (Quebec Pension Plan) and remit it and the employer amount to Revenu Quebec.
Employment Insurance (EI)
Employment Insurance, or EI, is a government program that provides income support to employees who lose their job or stop working for a period due to layoffs, illness, disability, or pregnancy.
Similar to CPP, employers must deduct a portion of an employee's gross pay each pay period and remit it to the CRA. EI is also subject to an annual maximum, and employers also contribute an amount (albeit a higher amount) each pay period.
In Quebec, the contribution rate that employees and employers pay each pay period is lower, however employees and employers must also contribute to the province's Quebec Parental Insurance Plan, or QPIP, each pay period.
Other statutory deductions
Depending on where an employee works and where their company is located, there may be other required payroll deductions and contributions. This can include provincial payroll taxes such as employer health taxes, worker's compensation premiums, or union dues and company pension plan contributions.
If a company has a group benefits plan, some deductions may be made from employee gross pay as well. Employees usually pay the premiums for coverage such as life insurance, AD&D, dependent life, and critical illness. If an employer paid these premiums the benefit of these policies to the employee would be taxable. However, if the employee pays the premiums the benefit is not taxable.
Employers are also responsible for deducting and remitting court-ordered alimony and wage garnishments.
Voluntary payroll deductions
Employees can volunteer to have other amounts deducted from their pay on top of the statutory deductions mentioned above.
The most common voluntary deductions are payments into a Registered Retirement Savings Plan (RRSP) or into a Tax-Free Savings Account (TFSA). RRSPs are analogous to 401(k) plans in the US, where contributions are tax-deductible, and withdrawals are taxable when an employee withdraws amounts in retirement.
TFSAs are like Roth IRAs in the US, where contributions are made with post-tax dollars but savings and investments in a TFSA account are allowed to grow and be withdrawn tax-free. Both RRSPs and TFSAs are subject to maximum annual contribution amounts.
Other voluntary deductions may include some health benefit program premiums, where the employee and the employer share equally in the payment of health benefit premiums but the employer's share is not reflected in the pay stub. Premiums for health benefits programs are considered voluntary payroll deductions if the employee can choose the amount of coverage and thus how much they pay in premiums.
How to remit payroll deductions in Canada
Employers must remit statutory deductions and additional employer contributions to the CRA. As we mentioned above, employers must have a business number and payroll account number from the CRA before withholding and remitting these payroll deductions.
In Quebec, employers must remit provincial taxes, QPP, and QPIP to Revenu Quebec rather than the CRA.
The schedule for remitting payroll deductions and contributions to the CRA is based on the type of remitter and the payroll pay day. The type of remitter is determined based on the average monthly withholding amount (AMWA), which is calculated by adding up all the income taxes, CPP, and EI, withholdings remitted to the company's payroll program accounts in the previous two calendar years. The amount is then divided by the total by the number of months in that year (maximum 12) that the employer had to make payments in.
Regular remitters
By default, new employers, or those with an AMWA over the previous two years of less than $25,000, are considered regular remitters and must remit the deductions on or before the 15th day of the month following the month in which the deductions were made.
For example, deductions and contributions owed to the CRA that were made on any pay days in November are owed to the CRA on December 15th.
Quarterly remitters
New small employers paying remuneration for the first time will have the option to apply for and remit payroll deductions quarterly instead of monthly for the first year. Eligibility requirements for this are as follows:
- the employer's monthly withholding amount (MWA) is less than $1,000, and
- the employer has a perfect compliance history.
For eligible new small employers choosing quarterly remittances, the due date is on or before the 15th day of the month immediately following the end of each calendar quarter. The remittance dates are April 15, July 15, October 15, and January 15 each year.
Accelerated remitters
Large employers with an AMWA of $100,000 or more must pay their remittances on an accelerated schedule. Most larger employers engage payroll service companies or employers of record like Thirdsail to reduce the complexity of compliance with the payroll deductions and do the calculation and the remittances on their behalf.
There are two types of accelerated remitters at two different thresholds. The table below provides a description of the thresholds and the remittance due dates for each.
Seasonal employers
Employers with no source deduction, such as seasonal employers or those that changed business status, also need to report a nil remittance to the CRA by the due date; otherwise, the CRA will expect a remittance from the employer on the due date.
If a company does not remit the correct payroll deduction and contribution amounts, or is late with a remittance, the CRA may levy fines, penalties, and interested owed to the CRA.
Thirdsail makes payroll easy
You need an efficient and compliant payroll solution to hire the best employees in Canada. Thirdsail is here to help.
Thirdsail helps companies around the world hire employees in Canada. We help you hire employees instantly without having to open a subsidiary and make sure your employees have all the right deductions and contributions that are remitted on time.
Making payroll deductions can be complicated, which is why understanding how deductions work is important for both employers and employees.
