What Are Payroll Deductions?

Payroll deductions are amounts withheld from an employee's gross pay before they receive their net pay (take-home pay). Employers are legally required to deduct, remit, and report these amounts to the Canada Revenue Agency (CRA).

Types of Payroll Deductions

1. Canada Pension Plan (CPP) Contributions

CPP provides retirement, disability, and survivor benefits to Canadians.

Employee Contribution (2024):

• Rate: 5.95% of pensionable earnings
• Maximum: $3,867.50 annually
• Exemption: First $3,500 of annual earnings
• Maximum Pensionable Earnings: $68,500

Employer Contribution:

• Employers match employee contributions (5.95%)
• Maximum employer contribution: $3,867.50

Who Is Exempt?

• Employees under 18 or over 70
• Employees earning less than $3,500 annually
• Certain types of employment (e.g., casual babysitting)

2. Employment Insurance (EI) Premiums

EI provides temporary financial assistance to unemployed Canadians while they look for work or upgrade skills.

Employee Premium (2024):

• Rate: 1.66% of insurable earnings
• Maximum: $1,049.12 annually
• Maximum Insurable Earnings: $63,200

Employer Premium:

• Employers pay 1.4 times the employee premium
• Rate: 2.324% of insurable earnings
• Maximum employer premium: $1,468.77

Who Is Exempt?

• Self-employed individuals (unless they opt in)
• Employees over 65 receiving pension
• Certain types of employment (e.g., commission salespersons with control over income)

3. Income Tax

Employers must withhold federal and provincial/territorial income tax based on the employee's earnings and completed TD1 forms.

How Much to Withhold?

Use CRA's Payroll Deductions Online Calculator (PDOC) or payroll tables to determine the correct amount based on:

• Employee's gross pay
• Pay frequency (weekly, bi-weekly, monthly)
• Province of employment
• TD1 claim amounts (personal credits)

Federal and Provincial Tax Rates (BC Example, 2024):

Federal:

• 15% on first $55,867
• 20.5% on $55,867 to $111,733
• 26% on $111,733 to $173,205
• 29% on $173,205 to $246,752
• 33% over $246,752

BC Provincial:

• 5.06% on first $47,937
• 7.7% on $47,937 to $95,875
• 10.5% on $95,875 to $110,076
• 12.29% on $110,076 to $133,664
• 14.7% on $133,664 to $181,232
• 16.8% on $181,232 to $252,752
• 20.5% over $252,752

Employer Obligations

1. Register for a Payroll Account

Before hiring your first employee, register for a payroll program account with CRA. You'll receive a 15-character business number (BN) with a payroll account identifier (RP).

2. Calculate and Deduct

Use CRA's PDOC or payroll software to calculate deductions for each pay period.

3. Remit Deductions

Remittance frequency depends on your Average Monthly Withholding Amount (AMWA):

• Quarterly: AMWA less than $1,000
• Monthly: AMWA $1,000 to $14,999
• Accelerated (twice monthly): AMWA $15,000 to $49,999
• Accelerated (four times monthly): AMWA $50,000 or more

4. File Information Returns

By February 28 each year, file:

• T4 Slips: Statement of Remuneration Paid for all employees
• T4 Summary: Summary of all T4 slips

5. Keep Records

Maintain payroll records for at least 6 years, including:

• Employee information (SIN, address, TD1 forms)
• Hours worked and pay rates
• Deductions made each pay period
• Remittance receipts

Common Payroll Mistakes

1. Incorrect Classification

Misclassifying employees as independent contractors to avoid payroll obligations can result in penalties and back payments.

2. Late Remittances

Missing remittance deadlines results in penalties:

• 3% if 1-3 days late
• 5% if 4-5 days late
• 7% if 6-7 days late
• 10% if more than 7 days late or no payment

3. Incorrect Deductions

Under-deducting results in employee owing CRA; over-deducting reduces employee take-home pay and creates refund complications.

4. Not Updating TD1 Forms

Employees' personal situations change (marriage, children, etc.). Ensure TD1 forms are updated annually.

Taxable vs. Non-Taxable Benefits

Taxable Benefits (Include in Income):

• Company car for personal use
• Gym memberships
• Gifts over $500 annually
• Housing and board
• Stock options

Non-Taxable Benefits:

• Employer-paid health and dental insurance
• Uniforms and safety equipment
• Employee discounts (reasonable)
• Transportation to remote work locations
• Professional development and training

Payroll Software Solutions

Using payroll software simplifies compliance and reduces errors. Popular options include:

• QuickBooks Payroll: Integrated with accounting
• Wagepoint: Canadian-specific, user-friendly
• ADP: Comprehensive for larger businesses
• Rise: Affordable for small businesses

Year-End Payroll Tasks

1. Review Employee Information: Ensure SINs and addresses are accurate
2. Reconcile Payroll Records: Verify totals match remittances
3. Prepare T4 Slips: Generate slips for all employees
4. File T4 Summary: Submit to CRA by February 28
5. Distribute T4s to Employees: Provide copies by February 28
6. Prepare for New Year: Update rates and thresholds for new year

CRA Audits and Compliance

CRA may audit your payroll to ensure compliance. During an audit, they review:

• Accuracy of deductions
• Timely remittances
• Proper employee classification
• Completeness of records

Best Practices:

• Keep detailed, organized records
• Use CRA-approved calculators
• Remit on time, every time
• Seek professional advice when unsure

Get Professional Payroll Help

Managing payroll in-house can be time-consuming and risky. Calvin Bui & Partners offers comprehensive payroll services to ensure accuracy, compliance, and peace of mind.