Introduction to payroll deductions in Canada

An employee’s income may consist of salary, commissions, bonuses, business expenses, such as a car allowance, or other sources of income. Accurately calculating gross pay, encompassing salary, commissions, bonuses and taxable employee benefits like car allowances, is important, as it forms the basis for all payroll deductions and ensures compliance.

To enroll an employee in a payroll program, employers require their social insurance number (SIN) and a completed TD1 form. Employers should refer to the official payroll deductions tables published by the Canada Revenue Agency (CRA) to ensure accurate deductions, as these tables are updated at the start of each calendar year.

Understanding how to calculate payroll and remit these deductions is essential to comply with Canadian tax and employment laws. Proper payroll management ensures your business meets its legal obligations, helps you avoid costly penalties and keeps your employees’ pay accurate and timely.

Payroll deductions employers are responsible for in Canada

You are responsible for deducting income tax, Canadian Pension Plan contributions and Employment Insurance premiums as an employer. Beyond statutory deductions, employers may also deduct contributions for voluntary benefits like extended healthcare, dental, vision or life insurance plans and Registered Retirement Savings Plans (RRSPs), if offered and elected by employees.

At tax time, employers are required to record employee income and deductions on a T4 or T4A slip, which must be issued to employees and filed with the CRA by the last day of February each year. Net pay is the amount the employee receives after all the necessary deductions have been withheld.

If your company resides in Quebec, the contributions differ from those of the rest of the country. Employers deduct the Quebec Pension Plan (QPP) instead of the Canadian Pension Plan in Quebec. The province also deducts its provincial tax, the Quebec Parental Insurance Plan and Employment Insurance premiums. Depending on their status, some employees may be exempt from certain deductions, such as the Quebec Pension Plan or Employment Insurance.

When collecting the deductions from an employee’s paycheque, keeping that money in a separate account can be best to ensure these funds are segregated and available for timely remittance to the government.

Canada Pension Plan (CPP)

The Canada Pension Plan (CPP) is a mandatory retirement savings program that provides income to Canadians after they retire. These deductions help your employees build their retirement savings.

Employers are required to deduct CPP contributions from their employees’ pay and match those contributions dollar for dollar. Complying with CPP regulations protects your business from potential fines or audits.

For 2025, the current CPP contribution rate is 5.95% of each employee’s gross earnings, up to the annual maximum contribution of $4,034.10. Both you and your employees contribute this percentage, making it important to calculate CPP contributions accurately for every pay period.

Employment Insurance (EI)

Employment Insurance (EI) is designed to provide temporary financial assistance to employees who are out of work due to job loss, illness or other qualifying reasons. As an employer, you are required to deduct EI premiums from your employees’ pay and contribute 1.4 times the amount deducted.

The 2025 EI premium rate is 1.64% of an employee’s insurable earnings, with a maximum annual premium of $1,077.48. It’s essential to calculate EI premiums correctly based on each employee’s insurable earnings to ensure compliance with federal regulations.

Properly managing employment insurance deductions on the employee’s record of employment (ROE) helps them access EI benefits when needed and keeps your business in good standing with the Canada Revenue Agency.

Workers’ compensation

Workers’ compensation is a provincial or territorial program that provides benefits to employees who experience work-related injuries or illnesses, including wage loss replacement, medical expenses and other related costs.

As an employer, you are responsible for paying workers’ compensation premiums, which are determined by your business’s industry classification and the province or territory where you operate.

The premium rates can vary significantly depending on the type of work your employees perform and the associated risks. It’s essential to accurately calculate and remit these premiums to ensure your employees are protected and your business complies with local regulations.

Employer health tax

The Employer Health Tax (EHT) is a payroll tax that applies to employers in Ontario, Quebec, British Columbia, Manitoba and Newfoundland & Labrador. The EHT is calculated based on the total remuneration paid to employees who report to work in the province.

If your business meets the threshold for EHT, you must register, calculate and remit the tax as required by your provincial government. The EHT rate and exemption limits vary by province, so employers should consult their respective provincial government websites for specific EHT rates and exemption thresholds.

To ensure accuracy, many employers use a free online payroll calculator or consult a professional accountant to help calculate and remit the correct amount of EHT, keeping your payroll processes compliant and efficient.

How to calculate federal, provincial and territorial payroll deductions

When determining what you need to deduct from an employee’s paycheque, it is best to start with the CRA payroll deduction online calculator (also known as the payroll deductions online calculator). There are three different factors to consider when calculating:

Before making payroll calculations, it’s important to understand your source deductions:

1. Income tax: This amount changes based on where your business or employee resides. The CRA online calculator determines how much tax to deduct for your employee based on where they live and work.
2. Canadian Pension Plan: For employees between 18 and 69, you must deduct Canadian Pension Plan contributions unless the employee lives in Quebec. Employees aged 65 to 70 receiving a CPP retirement pension can elect to stop contributing to CPP. Contributions are calculated up to the maximum pensionable earnings set annually by the government. You can find information about maximum contributions, exemptions, and other useful information required on the Canadian Pension Plan page.
3. Employment Insurance premiums: Employers should deduct the employee’s EI premium (EI rate multiplied by insurable earnings) from their paycheque until the annual maximum is reached. Employers then contribute 1.4 times the amount of the employee’s premium. There is no age limit requirement, but when the annual maximum has been hit, you no longer need to deduct the amount from an employee’s pay. If you offer employees a short-term disability plan, you may be eligible for a reduced rate.

There are some exceptions to deductions for employees where you don’t have to collect the Canadian Pension Plan or Employment Insurance Premiums. If an employee falls within any of the following brackets, you do not need to deduct these contributions:

• If your employee is receiving a CPP disability benefit
• If your employee is over the age of 70 and receiving a CPP retirement pension
• If your employee is between the ages of 65 and 70 and provides you with a CPT30 form, then they can file for a stop to the contribution

Steps for payroll in Canada

There are several steps you must take to start the process of calculating and taking the payroll deductions. Payroll calculators and online tools provide general guidance but should not replace professional advice for complex payroll situations:

1. Create a payroll account

To get started, register with the government of Canada and create a payroll account. If this is your first time signing up for an account, you need a registered Business Number (BN), which can be created through the CRA. Once you have a Business Number, you can add a payroll deduction account to your profile.

2. Gather employee information

Employees should complete the TD1 form to provide the required personal information, including the employee’s SIN number, during the hiring process. Be sure to verify their SIN number with their name. Be vigilant about SINs starting with “9,” as these indicate a temporary resident and require further verification to confirm legal work status in Canada.

3. Calculate and start the deduction process

You may need to sit down with an accountant for this process, though it is possible to do it independently if you have a decent understanding of accounting. At the very least, you need to know the employee’s salary, any taxable benefits, and their eligibility for any deductions. Payroll deductions are calculated based on the employee’s total wages, including bonuses or commissions.

Next, determine their Canadian Pension Plan, Employment Insurance, and income tax deductions. In Quebec, employers must also calculate and withhold contributions for the Québec Pension Plan and the Québec Parental Insurance Plan.

For guidance on how to calculate employees’ overtime pay accurately, consult additional resources.

It’s also important to determine if your company has any other deductions. If your company offers health benefits that employees contribute to, a company RRSP, TFSA-matching or pension programs, these should also be deducted from their pay.