Canada Tax

How Payroll Deductions Work in Canada

Like every other developed country and government, Canada ensures that taxes are levied for the smooth running of government programs and expenses. One of such taxes is the payroll deductions. With payroll deductions, an employer withholds certain percentage of money from an employee’s payroll check, for various purposes. The employers are not mandated by law to bear full expenses of their employees’ insurance premiums, so that the employees must also pay a portion. This is usually done through payroll deductions.

Payroll deductions are the amounts deducted from an employee’s payroll check, and this deducted amount are withheld by the employer for remittance.

Understanding Payroll Deductions

The payroll deductions include Income tax, employee contributions to employment insurance (EI), employee contributions to the Canada Pension Plan (CPP). Invariably, the deduction implies that the amount on the payroll check of the employee will be less than the total earned by him or her. The employer by law must withhold and equally remit the deducted amount directly to the Canada Revenue Agency (CRA).  The employee is given credit for the payment of these payroll deductions.

Employer Payroll Deductions

Irrespective of the number of hours that an employee has worked, the payroll deductions must be withheld from the employee’s payroll check. If for some reasons however, that no deductions are made or withheld by the employer, the liability and responsibility will fall on the employer for any mandated amount that are meant to be withheld and remitted from the employee’s paycheck. This is why it is always the responsibility of the employer to ensure that all payroll deductions are withheld and remitted in a timely fashion.

Employers are to report the payroll through the calculation of Gross monthly wage earnings and various payroll deductions in order to arrive at a Net pay. Hence, the employers must be detailed, and ensure extreme accuracy whenever they are calculating the various payroll deductions.

Statutory Payroll Tax Deductions

The Canadian law stipulates that payroll deductions must be withheld from an employee’s payroll check. Thereafter, employers must transmit the withheld tax to various tax agencies. The statutory (government) tax deductions include the following:

  • Federal Income Tax withholding
  • Social Security Tax withholding
  • Medicare Tax withholding
  • State Income Tax withholding
  • Various Local Tax withholding

Voluntary Payroll Tax Deductions

The Voluntary Payroll Tax Deductions are the tax withheld from an employee’s payroll check only if the employee and the employer enter an agreement for such deductions. The voluntary deductions are contributions made by the employees towards the various benefits which the employee has chosen to be involved in. Voluntary Payroll Deductions include the following:

  • Health Insurance Premiums (Medical, Dental, and Eye-care).
  • Life Insurance Premiums
  • Retirement Plan Contributions
  • Employee Stock Purchase Plans.
  • Meals, uniforms, Union dues, and other expenses incurred in the job.

Employer Payroll Taxes and Responsibilities

It is also the responsibility of an employer to equally contribute part or a portion of the payroll deductions, in addition to the ones contributed by the employees. These are added expenses over the employee’s gross pay. They include:

  • State security tax
  • Medicare taxes
  • Federal unemployment tax (FUTA)
  • State unemployment tax (SUTA)

Meanwhile, in addition to issuing paychecks to employees of the company, the employer is among other things, held responsible for the following:

  • The payment of employer’s share of payroll taxes.
  • The deposit and payment of tax dollars that were withheld from the employee’s paycheck in a timely manner.
  • The preparation of reconciliation reports.
  • Giving proper financial account and report of the payroll expenses.
  • Filing payroll tax returns.

Calculating Payroll Tax Deductions in Canada

The Canadian Revenue Agency (CRA) requires employers and employees to make deductions from their businesses and payroll check respectively. These deductions are:

  • Canada Pension Plan (CPP).
  • Employment Insurance (EI).
  • Federal and Provincial Income Tax.

Canada Pension Plan (CPP)

For the year 2020, the total maximum pensionable earnings for an employee are $58,700 while the basic exemption for the same year is $3,500. The rate for the employee contribution has been pegged at 5.25%. This increase in contribution rate according to the Canadian government is due to the Canada Pension Plan enhancement. Thus, the maximum amount an employee can contribute for the year is $2,898 while the contribution of the employer is the amount equal to the total of contributions deducted from the employee.

Employee’s Canada Pension Plan basic exemption for various pay periods

Pay period Basic exemption ($)
Annually (1) 3,500
Semi Annually (2) 1,750
Quarterly (4) 875
Monthly (12) 291.66
Semi Monthly (24) 145.83
Bi-weekly (26) 134.61
Bi-weekly (27) 129.62
Weekly (52) 67.30
Weekly (53) 66.03
22 pay periods 159.09
13 pay periods 269.23
10 pay periods 350
Daily (240) 14.58
Hourly (2000) 1.75

Formula To Calculate Canada Pension Plan Deductions

The formula below is for calculating the Canada Pension Plan (CPP) contributions for employees receiving salary or wages:

C = the lesser of;

  1. $2,898.00 – D
  2. 0525 (5.25%) X [PI-($3500/P)]:

Where:

C= Canada pension plan contributions for the pay period

D= The employee’s year to date

PI= Pensionable income for the pay period including bonuses and pay increases

P= Number of pay periods in the year

Employment Insurance (EI)

For the year 2020, the Canadian government has pegged the maximum annual insurable earnings at $54,200 and the Employment Insurance (EI) rate at 1.58%, while the maximum annual premium is $856.36.

For instance, if an employee makes $40,000 of insurable earnings, the maximum premium will be calculated as $40,000 X 1.58% = $632.00

Formula To Calculate EI Premiums

The formula below will aid you in determining the calculations in your payroll as an employee, as well as the premium payable by an insured person under the Employment Insurance Act.

EI= The lesser of;

  1. $856.36 – D1
  2. 0158 (1.58%) X IE

Where:

EI= Employment insurance premiums for the pay period.

D1= Employee’s year to date details, and employee insurance premium with current employer.

IE= Insurance earnings for the pay period including insurable taxable benefits, bonuses and pay increases.

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