There are four main payroll taxes that are deducted in Canada. In Québec, there are a couple of more. This article will explain how these taxes are calculated to provide you with a better understanding of what is being deducted from your employees. To see how things are calculated for companies in Québec, click here. The four main taxes collected by the CRA are CPP, EI, federal and provincial taxes.
Canada Pension Plan (CPP)
The first tax to be deducted from an employee's pay is CPP. CPP is a deduction off of pensionable earnings which deducts up to a certain maximum amount per year. After the employee has reached the maximum contribution limit, no additional CPP is deducted. To understand the calculation, we first need to understand the CPP exemption. Each employee gets a certain exemption amount per pay run, which is the annual exemption of $3500 divided by the number of pay periods per year. This per-pay run amount is then subtracted from the employee’s wages + taxable benefits to get the total pensionable earnings. Let’s breakdown an example:
Wages + taxable benefits = $1000
CPP Rate (2021) = 5.45%
Pays per year: 26 (bi-weekly)
Annual CPP Exemption = $3500
CPP Exemption per pay run = 3500 / 26 = $134.61
Pensionable Earnings = 1000 – 134.62 = $865.39
Employee CPP Contribution = 5.45% x 865.38 = $47.16
Employer CPP Contribution= $47.16
Total CPP Contribution= $94.32
As an employer, you not only have to remit CPP on behalf of the employee, but you also have to match their contribution dollar for dollar. This is something to keep in mind when estimating the total cost of an employee.
If an employee is below the age of 18 or over 70, they do not contribute to CPP until the first pay in the month after they turn 18/70. Example, they turn 18/70 on June 1, they will start (18)/stop(70) paying CPP on their first pay date in July.. When adding such an employee to the system, don’t worry about manually exempting them from this tax – the system will handle that automatically. There are also other circumstances where an employee may be exempt, so we recommend checking with your accountant or the CRA to confirm if ever an employee notifies you that they are exempt.
Please note: if you are running a Special Run, the CPP exemption will not be calculated. This is because special pay runs are meant to be completed as additional or off-cycle runs. This means that they end up paying a slightly greater CPP amount (as it’s being calculated as a percentage of wages + benefits, rather than wages + benefts – exemption), but this is correct for this kind of pay run. If you were to run an additional pay run as a regular run where the CPP exemption is calculated, then you risk over-exempting your employees. For example, a bi-weekly employee has an exemption of $134.61 per pay run (as above). If they were to be included in a 27th pay run, their annual exemption would increase to $3634.61, possibly leading to penalties from the CRA.
For more information on the current exemptions and maximum contributions, see the CRA page below:
Employment Insurance (EI)
EI is a deduction off of an employee's insurable earnings, up to a certain maximum contribution per year. As with CPP, once an employee reaches their maximum contribution, they are deducted no further EI amounts.
Insurable earnings are any cash-based earning or benefit, such as an employee’s regular earnings or an internet reimbursement benefit. In most cases, non-cash benefits are not considered insurable, but it’s always best to check with an accountant or the CRA when in doubt.
Similar to CPP, an employer also has to make their own EI contributions based on the employee's deduction. Rather than dollar for dollar, it is 1.4x the employee’s amount, unless your company has received a reduced rate from CRA. If this is the case, please contact us for how to implement this in your account.
EI is a straight calculation with no exemptions.
For 2021 the rate is 1.58% of insurable earnings.
Example: Insurable earnings (cash earnings and benefits) = $1000.00
1000* 1.58%= $15.80
Employee EI Contribution= $15.80
Employer EI Contribution= 15.80*1.4= $22.12
Total EI Contribution= $37.92
For more information on EI rates and maximums, see the CRA’s page below:
Federal Taxes
Federal taxes are calculated on an employee’s total taxable income. There is a basic amount that each person can earn before being subject to federal tax (which is annualized based on their current pay). If an employee has an exemption beyond the basic amount, they should have aded this to their completed TD1 form to notify you what that amount is when they were first hired. You can update the TD1 amounts in their employee profile so that they can be taxed accordingly.
If ever an employee earns less than the exemption amount then federal tax may not be deducted. Payroll tax tables are based on a per pay period amount that is annualized. So an employee who is working temporarily, who may end up making less than the exemption amount, may still pay tax if their pay during their working period is high enough to taxed when it is annualized. They can apply to receive any overpayments back on their personal income tax return. If an employee is earning beyond the exemption amount, then they will begin to have tax deducted based on their income bracket. Federal tax is calculated as a percentage of their annualized income up to a certain threshold. Once the employee earns beyond that threshold, they are taxed at a higher percentage for the next threshold, and so on.
With federal tax, there is no additional employer contribution – you remit only what is deducted from the employee.
For more information on the current tax tables, please see the page below from the CRA:
For all provinces and territories with the exception of Québec, the CRA collects provincial tax. It is very similar to federal tax in the sense that there is no additional employer contribution, and that each employee has a certain amount that they can earn before being subject to the tax. If an employee has an amount higher than the basic exemption and has submitted to you their provincial TD1 form, you can modify this amount in the employee profile. As with federal tax, it is calculated based on the annualized income bracket with varying percentages as the employee earns more.
For more information on the current provincial and territorial tax tables, please see the page below from CRA: