How do CRA payroll deductions work in Canada?
Every Canadian employer must withhold Canada Pension Plan (CPP) contributions at 5.95%, Employment Insurance (EI) premiums at 1.66%, and federal and provincial income tax from each employee's pay. The employer must also pay a matching CPP contribution and a 1.4x EI contribution on top of the employee share, and remit all amounts to the CRA on schedule.
Detailed Explanation
Payroll in Canada involves three required deductions from employee pay, plus employer contributions on top. The system is administered by the Canada Revenue Agency (CRA) and all deductions must be calculated, withheld, and remitted to the CRA within set deadlines.
Canada Pension Plan (CPP) contributions
CPP provides retirement, disability, and survivor benefits to working Canadians. For 2026: - Employee contribution rate: 5.95% of pensionable earnings - Annual maximum employee contribution: $3,867.50 - Basic exemption: $3,500 per year (first $3,500 of earnings are not subject to CPP) - Maximum pensionable earnings: $73,200 (2026)
Calculation: CPP contribution = 5.95% x (annual earnings - $3,500 basic exemption), up to the maximum contribution of $3,867.50.
Note: A second CPP tier (CPP2) applies to earnings above $73,200 up to $81,200 (2026), at a rate of 4% for both employee and employer. The CPP2 maximum additional contribution is $396.
Quebec operates its own Quebec Pension Plan (QPP) with similar (but not identical) rates for employees in Quebec.
Employment Insurance (EI) premiums
EI provides temporary income to workers who lose their jobs, take parental leave, or become ill. For 2026: - Employee premium rate: 1.66% of insurable earnings - Annual maximum employee premium: $1,077.48 - Maximum insurable earnings: $65,700 (2026)
Note: Quebec employees pay a reduced EI premium (1.31% in 2026) because Quebec has its own provincial parental insurance plan (QPIP).
Corporate owner-shareholders who control more than 40% of voting shares may be exempt from EI premiums if they would not qualify for EI benefits due to their controlling relationship with the employer corporation.
Federal and provincial income tax withholding
Personal income tax is withheld from each paycheque based on the employee's annual earnings extrapolated, less allowable credits. Employees submit a TD1 form (federal) and a provincial TD1 form to declare their personal credits.
In 2026, the federal basic personal amount is $16,129. The federal income tax rates are: - 15% on the first $57,375 of taxable income - 20.5% on the next $57,375 ($57,375 to $114,750) - 26% on the next $63,649 ($114,750 to $178,399) - 29% on the next $69,660 ($178,399 to $248,059) - 33% on taxable income over $248,059
Employer contributions
The employer is not just a withholding agent — employers also pay their own contributions: - Employer CPP contribution: equal to the employee CPP contribution (1:1 match) - CPP2 employer contribution: equal to the employee CPP2 contribution - Employer EI premium: 1.4 times the employee EI premium
For every $100,000 in employment income, the total employer CPP and EI cost adds approximately $8,000-$9,000 to the payroll cost.
Remittance deadlines
Deductions withheld from employees must be remitted to the CRA along with employer contributions. The schedule depends on your business's average monthly withholding amount (AMWA): - Regular remitters (AMWA $25,000-$99,999): remit by the 15th of the following month - Quarterly remitters (small employers, new employers): remit quarterly - Accelerated remitters - Threshold 1: remit by the 25th of the current month and the 10th of the following month - Accelerated remitters - Threshold 2 (AMWA $100,000+): remit within 3 banking days of each payroll - New employers and small deductors (AMWA under $3,000): remit quarterly
Late or short remittances attract penalties of 3-10% depending on how late and how many late remittances have occurred. The CRA can also assess directors personally for unremitted payroll deductions if the corporation fails to remit.
T4 slips and year-end filing
By the last day of February each year, employers must: - Prepare a T4 slip for each employee showing employment income, CPP contributions, EI premiums, income tax deducted, and other taxable benefits - File a T4 Summary with the CRA - Give each employee their T4 slip
Electronic filing is mandatory if you have 6 or more T4 slips.
Source: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/calculating-deductions/how-to-calculate.html
Real-World Examples
Single employee earning $75,000
Employee earns $75,000 annual salary. CPP contribution: 5.95% x ($73,200 - $3,500) = $3,867.50 max, plus CPP2 on earnings $73,200-$75,000: 4% x $1,800 = $72. EI: 1.66% x $65,700 = $1,090.62 (earnings over $65,700 are not insurable). Federal income tax approximately $11,900, Ontario provincial approximately $5,200. Total employee deductions: about $22,200. Employer also pays $3,867.50 CPP + $1,526.87 EI = $5,394 in employer contributions.
Small business with quarterly remittance schedule
A 3-person agency is a new employer with AMWA under $3,000. They remit payroll deductions quarterly. Q1 (January-March): employee CPP $3,200, employee EI $1,400, income tax $8,600, employer CPP $3,200, employer EI $1,960. Total Q1 remittance: $18,360, due April 15. This schedule reduces the administrative frequency while still meeting the CRA's requirements.
Owner-manager incorporated — no EI on dividends
An owner-manager holds 100% of shares in her corporation. She pays herself $50,000 salary and $80,000 in dividends. On the $50,000 salary: CPP = 5.95% x ($50,000 - $3,500) = $2,767.25 (employee) + $2,767.25 (employer) = $5,534.50 total CPP. EI = exempt (she holds more than 40% of shares and would not qualify for EI). On the $80,000 dividends: no CPP, no EI, no income tax withheld at source — she pays the tax when filing her personal T1 return.
Common Mistakes to Avoid
- Remitting late because you confused the filing deadline for the T4 (February 28) with the remittance deadline for source deductions — remittances are due throughout the year, not just at year-end.
- Not withholding from the very first paycheque — the CRA holds employers responsible for unwithheld amounts even in the first payroll period.
- Assuming owner-managers are always exempt from CPP — if you pay yourself a salary, you must contribute CPP on that salary; only dividends are CPP-exempt.
- Missing the CPP and EI maximums and over-deducting from employees who have already reached their annual contribution limits — refund the over-deduction through future payrolls or at year-end.
Frequently Asked Questions
When does CPP stop being deducted in the year?
CPP deductions stop once the employee has contributed the annual maximum ($3,867.50 for 2026 CPP, plus up to $396 for CPP2). In payroll software, this is tracked automatically. Once the annual maximum is reached, no further CPP is deducted for the rest of the calendar year. CPP deductions restart on January 1 of the following year.
Can an employer reduce their EI premiums?
Yes. Employers who provide a short-term disability (STD) or wage-loss insurance plan that meets CRA criteria may qualify for a premium reduction, paying less than the standard 1.4x multiplier. The reduced rate is negotiated with Service Canada. This is most common for larger employers with formal group benefits plans.
What happens if I fail to remit payroll deductions?
The penalties for late remittance are 3% for remittances 1-3 days late, 5% for 4-5 days late, 7% for 6-7 days late, and 10% for more than 7 days late. A second late remittance within a year triggers a 20% penalty on the deficiency. Additionally, company directors can be held personally liable for unremitted payroll deductions under section 227.1 of the Income Tax Act — this is a piercing of the corporate veil that applies specifically to payroll.
Do I need to withhold payroll deductions for contractors?
No, if a worker is genuinely an independent contractor (self-employed), you do not withhold CPP, EI, or income tax — they manage their own obligations. However, the CRA frequently reviews contractor vs. employee classification, and misclassifying an employee as a contractor can result in the employer owing all back CPP (employee and employer share), EI, and income tax for the entire period. The classification is based on the real nature of the working relationship, not just the contract language.
Do payroll deduction rules apply to part-time or casual workers?
Yes. CPP, EI, and income tax withholding apply to all employment income regardless of whether the worker is full-time, part-time, casual, or seasonal. The only exemption is if the worker earns below the CPP basic exemption ($3,500 per year) or earns less than $2,000 from the employer for the year (EI-exempt in some cases). Always calculate deductions based on the actual amount paid each period.
Practical Tips
- Use CRA's Payroll Deductions Online Calculator (PDOC) to verify deduction amounts each time you process a non-standard payroll — it is free, accurate, and reduces the risk of manual calculation errors.
- Set a recurring calendar event for your remittance due dates — missing a remittance date, even by one day, triggers automatic penalties that the CRA rarely waives.
- If you hire a new employee, have them complete a TD1 federal and TD1 provincial form on day one — without these, you must withhold at the maximum rate as if no credits apply, resulting in over-deduction.
- Review CPP and EI maximums at the start of each calendar year — the CRA adjusts them annually and payroll software usually updates automatically, but verify the update has loaded before your first payroll of the year.
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