Payroll deductions are a core part of running payroll in Canada. For most employees, that means three things: income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums. These amounts are withheld from each paycheque automatically - funding programs like retirement benefits, income support, and parental leave.
For employers, getting this right isn't optional. Errors in calculation or remittance can mean penalties, interest, and unwanted attention from the CRA. For employees, understanding these deductions makes their pay stub a lot less confusing.
In this guide, we'll walk through every mandatory deduction, what's new in 2026, and how to stay on the right side of the CRA.
Who is required to make payroll deductions in Canada?
If you're paying people to work for you in Canada, you're almost certainly required to make statutory payroll deductions. That applies whether you're paying salaries, wages, commissions, bonuses, tips, or providing taxable benefits. It also applies to both Canadian and non-resident employers, as long as the work is being done in Canada.
Those deductions get remitted to the Canada Revenue Agency (CRA). The one exception is Quebec, where employers remit provincial deductions to Revenu Québec for employees reporting to a place of business in the province.
Self-employed individuals aren't subject to the same rules. Instead of having deductions withheld from their pay, they're responsible for calculating and paying their own income tax and CPP contributions when filing their personal tax returns. So if you're working with contractors rather than employees, the equation looks quite different.
Not sure whether your workers are employees or contractors? It's worth finding out. The CRA takes that distinction very seriously, and misclassifying workers can lead to back payments, penalties, and interest. If you need help navigating this, Thirdsail's employment experts can point you in the right direction.
Requirements before making payroll deductions
Before you can legally deduct and remit payroll amounts in Canada, you need to be properly registered with the CRA. Running payroll without the right accounts in place isn't just a procedural gap - it can trigger penalties before you've even made your first remittance. There are two things you'll need:
- A 9-digit Business Number (BN), which identifies the company with the CRA
- A payroll program account (RP account), used specifically for payroll deductions and remittances
Your payroll account sits under your business number (e.g., 123456789 RP0001) and is what you'll use to remit income tax, CPP, and EI. The CRA provides detailed guidance on how to register and get started.
You'll also need to collect some information from each employee before running payroll:
- The employee’s Social Insurance Number (SIN)
- A completed TD1 federal form and, where applicable, a provincial TD1 form - these tell you how much income tax to withhold based on the employee's personal tax credits
- Banking information for direct deposit, if applicable
The SIN is how income and deductions get reported to the CRA. TD1 forms should be collected before the first pay period runs, and employees should update them any time their personal situation changes. A new dependent, for example, can affect how much tax gets withheld.
If you're hiring in Canada for the first time, this setup process can feel like a lot. Thirdsail handles all of it on your behalf - from CRA registration to employee onboarding documentation - so you can focus on actually building your team.
Can employers be exempted from making payroll deductions?
In most cases, no. Employers in Canada are required to withhold and remit payroll deductions. That said, there are a handful of limited situations where those requirements can be reduced or modified, usually with CRA approval.
One example is the Regulation 102 waiver, which allows employers to reduce or eliminate income tax withholding on payments made to non-resident employees working temporarily in Canada. These waivers aren't automatic - they need to be approved by the CRA and are typically only granted when the employee is exempt from Canadian income tax under a tax treaty between Canada and another country. This comes up more often than you'd think, particularly for US-based employees working remotely from Canada.
EI premiums can also be exempt in certain situations. Employment involving family members, for example, may be exempt if the relationship is determined to be non-arm's length, though this is assessed case by case, so don't assume it applies automatically.
Finally, certain types of workers such as barbers, hairdressers, taxi drivers, and other passenger-carrying drivers are subject to special payroll rules. Deductions may still apply, but how they're calculated and remitted can differ depending on how the worker is classified.
When in doubt, don't assume an exemption applies. Back payments, penalties, and interest add up fast. The cost of getting it wrong will almost always outweigh any savings.
What are the statutory payroll deductions in Canada?
In Canada, employers are required to withhold certain payroll deductions from each employee's pay. Known as statutory deductions, these amounts must be calculated and remitted to the government on a regular basis - no exceptions.
You get to decide how often you pay your employees. Weekly, biweekly, semi-monthly, or monthly all work. What you don't get to decide is whether statutory deductions apply. They do, every single pay period.
Broadly, payroll deductions fall into two categories:
- Statutory deductions (required by law)
- Voluntary deductions (such as benefits premiums or retirement contributions)
Let's start with statutory deductions and what each one means for you as an employer.
Income taxes
Nobody's favourite topic, but an unavoidable one. In Canada, both federal and provincial income taxes are deducted from an employee's gross pay each pay period. Like the US, Canada uses a progressive tax system - meaning tax rates increase as income increases.
One thing that trips up a lot of international employers: payroll tax deductions are based on where the employee reports for work, not where they live. What the employee actually owes at year-end, however, is based on where they live.
For example, if you're a US company with a remote employee working out of Ontario, you can't simply run payroll from your US entity. Without a Canadian presence, you'll need a way to legally employ and pay that person, which is exactly what an Employer of Record like Thirdsail makes possible. Once that's in place, payroll tax deductions are based on Ontario rates, regardless of which province the employee lives in. When they file their return at year-end, they'll settle up with their province of residence. Depending on the difference between taxes withheld and taxes owed, they'll either get a refund or owe a little extra.
For 2026, the federal indexing factor is 2.0%, meaning income thresholds and personal amounts have been adjusted accordingly. Notably, the lowest federal tax bracket dropped from 15% to 14%, the first reduction in 25 years, which means slightly more take-home pay for most employees.
Canada Pension Plan (CPP)
CPP is Canada's public retirement program, and as an employer, you're required to contribute to it, not just withhold it. Each pay period, you deduct a portion of the employee's gross pay up to an annual maximum, and then match that amount yourself before remitting both to the CRA.
For 2026, the CPP employee and employer contribution rate is 5.95%, applied to earnings between $3,500 and $74,600 (the Year's Maximum Pensionable Earnings, or YMPE).
Keep in mind that as an employer, you're on the hook for matching every dollar of CPP your employee contributes. For a higher earner maxing out both CPP tiers, that's over $8,600 in combined contributions per year. It's an employment cost that's easy to underestimate if you're used to hiring in the US.
Starting in 2024, a second tier was introduced: CPP2. If an employee earns above the YMPE, an additional 4% contribution applies to earnings between $74,600 and $85,000 (the Year's Additional Maximum Pensionable Earnings, or YAMPE). This is a separate calculation from regular CPP. If your payroll system wasn't updated for CPP2, you may already be under-deducting. It's worth auditing before year-end.
In Quebec, CPP doesn't apply. Employers there deduct QPP (Quebec Pension Plan) instead and remit both the employee and employer portions to Revenu Québec.
Employment Insurance (EI)
Employment Insurance, or EI, is a government program that provides income support to employees who lose their job or stop working due to layoffs, illness, disability, or pregnancy. It's one of the core protections Canadian employees rely on, and as an employer, you're required to fund a portion of it.
Like CPP, you deduct EI premiums from each employee's gross pay every pay period and remit it to the CRA. The difference with EI is that your contribution as an employer is higher than the employee's. For every dollar an employee contributes, you remit 1.4 times that amount. For 2026, the employee EI rate is 1.63% on insurable earnings up to $68,900, making the maximum employee premium $1,123.11 and the maximum employer contribution $1,572.35 per employee.
If your company offers a qualified short-term disability plan, you may be eligible for a reduced EI premium rate. It's worth checking with the CRA or your payroll provider to see if you qualify - it's a commonly missed cost-saving opportunity.
In Quebec, the EI rate is lower because employees and employers also contribute to the Quebec Parental Insurance Plan (QPIP), which covers parental benefits separately. If you have employees in Quebec, you'll need to account for both.
Other statutory deductions
Depending on where your employee works and where your company is located, there may be additional required payroll deductions on top of CPP, EI, and income tax. These can include provincial payroll taxes such as employer health taxes, workers' compensation premiums, and union dues or company pension plan contributions.
Group benefits plans add another layer. If your company has one, some premiums may be deducted directly from employee gross pay. Here's the key tax distinction to understand: if the employee pays the premiums for coverage like life insurance, AD&D, dependent life, or critical illness, the benefit is not taxable. If the employer pays those premiums instead, the benefit becomes taxable income for the employee. It's a small but important detail that affects how you structure your benefits plan.
Finally, employers are also responsible for deducting and remitting any court-ordered payments such as alimony or wage garnishments. These aren't common, but when they do apply, they're mandatory.
Voluntary payroll deductions
On top of statutory deductions, employees can choose to have additional amounts withheld from their pay each period. These are called voluntary deductions, and while they're not required by law, they're a common part of most Canadian compensation packages.
The two most common are contributions to a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA). If you're familiar with US retirement accounts, here's how they compare:
- RRSPs work similarly to a traditional IRA. Contributions are tax-deductible, which reduces the employee's taxable income today, and withdrawals in retirement are taxed as income. For 2026, the RRSP contribution limit is 18% of the previous year's earned income, up to a maximum of $32,490.
- TFSAs work more like a Roth IRA. Contributions are made with after-tax dollars, but growth and withdrawals are completely tax-free. For 2026, the TFSA contribution limit is $7,000. Both are subject to annual contribution limits set by the CRA.
Many employers also choose to match employee RRSP contributions up to a certain percentage as part of their total compensation package. It's a popular retention tool in Canada and worth considering if you're competing for top talent.
Health benefit premiums can also be a voluntary deduction, depending on how your plan is structured. If employees can choose their level of coverage and pay the corresponding premiums through payroll, those deductions are considered voluntary. Keep in mind that the employer's share of premiums typically doesn't appear on the employee's pay stub, even when both parties are contributing.
How to remit payroll deductions in Canada
Once you've calculated and withheld the right deductions, you need to remit them to the CRA on time. As covered earlier, you'll need a business number and payroll account number before you can do any of this. If you're not set up yet, that's the first step.
In Quebec, the remittance process works differently. Employers there remit provincial taxes, QPP, and QPIP to Revenu Québec rather than the CRA.
Your remittance schedule depends on what type of remitter you are, which is determined by your average monthly withholding amount (AMWA). Your AMWA is calculated by adding up all the income tax, CPP, and EI you remitted over the previous two calendar years, then dividing by the number of months you were required to make payments in that period, up to a maximum of 12.
In plain terms: the more payroll you run, the more frequently you'll need to remit. There are four remitter types, each with different due dates.
Before we get into those, one important note on deadlines. Missing a remittance deadline isn't just an administrative inconvenience. The CRA charges penalties starting at 3% for amounts one to three days late, rising to 10% for amounts more than seven days late. Repeated failures can attract even steeper penalties.
Not sure how to calculate your deductions before remitting? The CRA's Payroll Deductions Online Calculator (PDOC) makes it straightforward. It calculates CPP, EI, and income tax deductions for any province except Quebec.
Regular remitters
Most new employers start here. If your AMWA over the previous two years is less than $25,000, you're a regular remitter. That means you remit deductions on or before the 15th day of the month following the month the deductions were made.
For example, deductions from any pay days in November are due to the CRA by December 15th. It's straightforward once you have a system in place.
Quarterly remitters
If you're a new small employer just starting out, you may qualify to remit quarterly instead of monthly for your first year. To be eligible, two conditions must both be met:
- Your monthly withholding amount (MWA) is less than $1,000
- You have a perfect compliance history with the CRA
If you qualify, remittances are due on or before the 15th day of the month following the end of each calendar quarter. In practice, that means four due dates per year: April 15, July 15, October 15, and January 15.
Accelerated remitters
As your business grows and your payroll increases, you may move into accelerated remitter territory. Employers with an AMWA of $25,000 or more fall into one of two accelerated thresholds, each with more frequent remittance deadlines.
One thing to watch: if your payroll grows and your AMWA crosses $25,000, your remitter type changes automatically. The CRA won't always notify you. It's worth reviewing your remitter status annually to make sure you're on the right schedule.
Most larger employers at this stage work with a payroll service provider or an employer of record like Thirdsail to manage the complexity. The calculation and remittance schedules become harder to track manually, and the penalties for getting it wrong increase accordingly.
Here's a breakdown of both accelerated remitter types:
Threshold 2 employers are remitting almost weekly. At that frequency, manual tracking becomes very difficult very fast. Most employers at this level have already handed payroll off to a provider - and for good reason.
Seasonal employers
If you're a seasonal employer or your business has changed status and you have no source deductions to remit in a given period, you still need to report a nil remittance to the CRA by the due date. This tells the CRA that you have nothing to remit that period rather than leaving them to assume a payment is simply late.
This applies in situations like:
- A seasonal business that shuts down operations over winter
- A company that has temporarily paused hiring
- An employer transitioning between business structures
Skipping this step is a common and easily avoidable mistake. The CRA expects to hear from you either way.
Canadian payroll compliance has a lot of moving parts - remittance schedules, threshold changes, nil reporting, and more. If managing all of this feels like a lot, you're not alone. The good news is that you don't have to do it yourself.
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.
