Canadian payroll deductions can be difficult to understand for employers, but it is essential to understand the various deductions that must be made from your employees’ paychecks. Payroll deductions are amounts taken from an employee’s gross pay and paid to various government programs or other organizations. Failing to comply with payroll deduction laws can result in significant financial penalties, so it is essential to know your obligations as an employer.
What are Canadian payroll deductions?
Payroll deductions are amounts taken from an employee’s gross pay to cover various government programs, such as income tax, Canada Pension Plan (CPP), and Employment Insurance (EI). Employers are responsible for calculating and withholding the correct amounts from their employee’s paychecks and remitting those amounts to the appropriate government agencies.
Types of Canadian payroll deductions
There are two types of payroll deductions: statutory and voluntary.
a. Statutory deductions
Statutory deductions are mandatory deductions that employers must make from their employees’ paychecks. These include federal and provincial income tax, CPP, and EI. The amounts deducted are determined by the employee’s salary or wages and the applicable tax rates.
b. Voluntary deductions
Voluntary deductions are deductions that employees choose to have taken from their paychecks. Examples of voluntary deductions include contributions to a group RRSP, group health insurance premiums, and charitable donations. Employers must have written authorization from the employee to make these deductions.
Calculating payroll deductions
Calculating payroll deductions can be a complex process, but there are many resources available to help employers ensure they are withholding the correct amounts.
a. Federal income tax deductions
Employers are required to deduct federal income tax from their employee’s paychecks based on the employee’s taxable income and the applicable tax rates. The Canada Revenue Agency (CRA) provides employers with a payroll deductions calculator to help them determine the correct amount to withhold.
According to the annual federal tax rates, employers must deduct 15% from the first $53,359 of taxable income. Using an example of $1,000 gross per pay period, an employee would be deducted $150. Employers do not contribute to employee federal and provincial taxes.
b. Provincial income tax deductions
In addition to federal income tax, employees in Canada are also subject to provincial income tax. Employers must deduct the appropriate amount of provincial tax based on the employee’s taxable income and the applicable tax rates.
Each province has its own set of published tax rates. With the rise of remote work, many Canadian businesses wonder how to handle deductions for employees living
c. Employment Insurance (EI) deductions
EI is a government-run program that provides temporary financial assistance to eligible Canadians who lose their jobs. Employers are required to deduct the appropriate amount of EI premiums from their employee’s paychecks based on the employee’s earnings and the applicable EI premium rate.
The government posts a list of the maximum insurable earnings and corresponding rates. The EI premium rates and maximums dictate the deductions. If an employee’s pay period grosses $1,000, multiply the pay period by the EI rate. In this example, $1,000 x 0.01.63 (as of 2023) results in $16.30 in deductions.
Now, where many employers go wrong is the matching contribution. Employers are responsible for paying 1.4 times the contribution amount of the employee. In our example, the employer would pay $16.30 x 1.4 resulting in $22.82. The employer supplies $22.82 + $16.30 totalling $39.12 per pay period.
The contributions must continue per pay period until the maximum insurable earnings are reached. At this point, the employer no longer needs to deduct and remit EI with that employee for the calendar year.
d. Canada Pension Plan (CPP) deductions
CPP is a government-run retirement program that provides a pension to eligible Canadians. Employers and employees both contribute to CPP, with the employer deducting the employee’s share from their paycheck. The amount of CPP deducted is based on the employee’s earnings and the CPP contribution rate.
CPP is handled similarly to EI by the government. A yearly list is posted on the federal website detailing the maximum annual employee and employer contribution, as well as the employee and employer contribution rate.
In 2023, employers and employees need to contribute 5.95% to a maximum of $3,754.45. Just as with our EI example, $1,000 x 0.0595 results in $59.5. This is the employee contribution, and when matched by the employer, the total is $119 per pay period until the maximum insurable earnings are reached.
e. Other deductions
Other deductions that employers may be required to make include contributions to a registered retirement savings plan (RRSP), union dues, and wage garnishments.
Employee benefits and their impact on payroll deductions
Employee benefits can have an impact on payroll deductions, as some benefits are taxable while others are not.
a. Group health insurance
Employers who offer group health insurance to their employees must deduct the employee’s share of the premium from their paycheck. However, some benefits, such as life insurance and disability insurance, may not be taxable.
b. Retirement savings plans
Employers who offer retirement savings plans, such as RRSPs, must deduct the employee’s contribution from their paycheck. However, some employer contributions to retirement savings plans may not be taxable.
Record-keeping and compliance
Employers must keep accurate records of all payroll deductions and remit those deductions to the appropriate government agencies on time. Failure to comply with payroll deduction laws can result in significant financial penalties and legal consequences.
a. Records employers must keep
Employers must keep records of all payroll deductions, including the employee’s name, address, social insurance number, gross pay, net pay, and all deductions made from their paychecks. These records must be kept for at least six years and be available for inspection by government auditors.
b. Reporting requirements
Employers must report all payroll deductions made from their employees’ paychecks to the appropriate government agencies on time. This includes submitting T4 slips to the CRA, which detail the employee’s income, tax deductions, and other deductions made from their paychecks.
How to manage payroll deductions
To ensure compliance, the Canada Revenue Agency hosts an online payroll deductions calculator to help small businesses with their CPP, EI, and federal and provincial deductions. This tool is great for small businesses that have yet to set up payroll with automatic deductions using PaymentEvolution.
As an employer in Canada, understanding payroll deductions is critical to complying with government regulations and avoiding financial penalties. By familiarizing yourself with the types of payroll deductions, calculating deductions accurately, and keeping accurate records, you can ensure that you are meeting your obligations as an employer.
Q: Can I deduct more than the required amount of CPP and EI from my employees’ paychecks?
A: No, employers are required to deduct only the appropriate amounts of CPP and EI based on the employee’s earnings and the applicable contribution rates.
Q: Can I offer benefits to my employees that are not subject to payroll deductions? A: Yes, some benefits, such as life insurance and disability insurance, may not be taxable and therefore not subject to payroll deductions.
Q: What happens if I fail to remit payroll deductions to the appropriate government agencies on time?
A: Failing to remit payroll deductions on time can result in significant financial penalties and legal consequences.
Q: What is the penalty for not complying with payroll deduction laws?
A: The penalties for non-compliance with payroll deduction laws can vary depending on the severity of the violation and can range from fines to legal action.
Q: Can I use payroll software to help me calculate payroll deductions?
A: Yes, there are many payroll software programs available that can help employers calculate payroll deductions accurately and efficiently.