They say that there are two certainties in life: death, and taxes. Death is so morbid, so, let’s talk about payroll taxes to get a better understanding of them. Some payroll taxes are just paid by the employee and some are matched by the employer as well. Some have an amount you are exempt from paying tax on, but no matter how much you make, you will have to pay at least some tax. There are four main types of taxes for all of Canada, except Quebec, which has a few more. See this article for Quebec Payroll Taxes Explained.
Federal and Provincial taxes are always based on your estimated income for the year. Salaried employees are pretty easy to work with, but time-based employees have variable earnings. This is the challenge for payroll providers to create the right equation so the employee is taxed the right amount and doesn’t owe at year end. The four main taxes to be aware of are federal tax, provincial tax, CPP (Canada Pension Plan), and EI (Employment Insurance). The way these taxes are calculated can vary depending on the earnings type, in this post we will be covering regular wages.
- The first tax taken off is CPP. CPP is 4.95% of the total pensionable earnings. *Pensionable earnings are wages plus taxable benefits less the pay period exemption. The exemption that everyone in Canada gets is $3500/year that they don’t have to pay CPP on. This amount is broken down per pay period. That being said, if your payroll is done on a bi-weekly frequency, you would take 3500/26 to get an exemption of $134.61 per pay. Note: (never round up on the exemption!)
- Let’s say the wages+benefits are $1,000. To get your pensionable earnings you would calculate: 1000-134.61= $865.39
- CPP is 865.39 x .0495= $42.84
- The company will match the employee portion dollar for dollar
- Note: Employees are exempt from CPP if they are under the age of 18 or over 70, and some other special cases. Please speak to your accountant or CRA to see if you or any of your employees are exempt.
- The annual employee maximum for CPP in 2017 is $2,564.10
- EI – Employment Insurance is the second tax taken from an employees’ pay. EI is calculated at 1.63% of the insurable earnings. Insurable earnings are any cash based earning or benefit. Non-cash benefits are not subject to EI in most cases. The company pays 1.4 times the employee amount for EI unless they have secured a reduced rate from CRA. The annual maximum for 2017 is $836.19.
- Federal tax: everyone gets a basic amount each year that they can make before they are subject to taxes. For 2017 that amount is $11,635, this means you can make this much without being taxed federally. After that (or based on the estimated earnings for the year) you will be taxed within the tax bracket for your estimated earnings.
- For tax brackets and rates see this CRA page: http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html
- These rates are not a simple percentage – so be aware, there is more that goes into the calculation behind the scenes than just these rates!
- CRA publishes tax tables each year for deducting federal and provincial taxes manually. 2017 tables can be found here: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/t4032/crrntyrt4032-eng.html
- Provincial Tax: for all provinces, except Quebec, CRA will collect and administer the tax to the Provinces. Provincial tax rates can also be found here: http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html
If you have any other questions regarding tax rates, contact your accountant or the CRA directly.
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