Payroll deductions are the amounts you take from an employee’s gross pay before they receive their net pay. In Canada, employers are responsible for calculating, withholding, and remitting certain payroll deductions, including Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax.
Some deductions are mandatory. Others, like benefits, retirement savings, union dues, or charitable donations, may depend on the employee’s workplace, agreement, or authorization.
This guide explains how payroll deductions work in Canada, which deductions employers need to know, and what to keep in mind when managing employee pay.
What are payroll deductions?
Payroll deductions help employers move from gross pay to net pay by withholding required or authorized amounts from an employee’s pay cheque. These amounts may go toward taxes, government programs, benefits, retirement contributions, garnishments, or other workplace deductions.
How are payroll deductions calculated?
There’s no one-formula-fits-all for payroll deductions. The calculations depend on a number of variables, including province or territory and the type of deduction it is.
Given that, it’s best to look up the guidelines for the specific deduction you’re working with as well as the provincial or territorial guidelines to make sure you have it right.
Statutory, pre-tax, and post-tax deductions
Payroll deductions fall into three groups: statutory, pre-tax, and post-tax. Knowing which group a deduction belongs to helps you calculate payroll correctly.
Statutory deductions
These are amounts the law requires you to withhold: Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax. For Québec employees, they also include Québec Pension Plan (QPP) contributions, Québec Parental Insurance Plan (QPIP) premiums, and Québec income tax.
Each one follows its own calculation:
- CPP and EI: You calculate these on the employee’s pensionable and insurable earnings.
- Income tax: You calculate this after subtracting pre-tax deductions from the employee’s pay.
Learn more about statutory deductions below.
Pre-tax deductions
These reduce the amount of pay used to calculate income tax. Examples include:
- Registered Pension Plan (RPP) contributions
- RRSP contributions you withhold and send directly to the employee’s RRSP
- Union dues
These deductions don’t reduce CPP pensionable earnings or EI insurable earnings.
Post-tax deductions
These come off once you’ve calculated income tax. Examples include:
- Garnishments: amounts you withhold under a court order or other legal requirement
- Non-registered savings plans: contributions to regular savings plans
- Employee-paid insurance premiums: most come off after tax, depending on the plan
Important: “Pre-tax” and “post-tax” are handy shorthand, not official CRA categories. The treatment of each deduction depends on federal and provincial rules and, sometimes, the specific plan. Check CRA’s payroll guidance and Revenu Québec’s requirements before you run payroll.
How payroll deductions work in Canada
Payroll deductions are part of the process that turns an employee’s gross pay into net pay.
At a high level, the process looks like this:
- Calculate gross pay: Start with the employee’s total earnings for the pay period, including wages, salary, overtime, vacation pay, bonuses, commissions, or other taxable earnings.
- Apply pre-tax deductions: Subtract deductions like RPP contributions, payroll RRSP contributions, and union dues.
- Calculate statutory deductions: Calculate CPP and EI on pensionable and insurable earnings, then calculate income tax on the remaining pay.
- Apply post-tax deductions: Deduct garnishments, post-tax benefit premiums, or other authorized withholdings.
- Pay the employee’s net pay: Once you’ve withheld deductions, pay the employee the remaining amount.
- Remit source deductions: Send required deductions to the CRA by the correct deadline. Québec employers also remit Québec deductions to Revenu Québec.
- Keep payroll records: Show deductions clearly on employee pay statements, and record them for reporting, remittances, and year-end forms.
Common types of payroll deductions
Statutory payroll deductions in Canada
Statutory deductions are the payroll deductions the law requires employers to withhold. For most Canadian employers, the main statutory deductions are CPP contributions, EI premiums, and income tax. Québec employers also deduct QPP, QPIP, and Québec income tax.
Employers are responsible for calculating these amounts, withholding them from employee pay, and remitting them by the required deadline.
Income tax
Income tax is the federal and provincial or territorial tax on employee earnings. Both levels of government use a progressive system: as someone earns more, they pay a higher rate on the portion of their income above each threshold, based on income brackets.
The provincial or territorial tax that applies depends on the employee’s province or territory of employment, not where they live. If you’re not sure which one applies, contact the CRA.
CRA builds tax rates into its payroll deductions tables. It updates them every January and again mid-year when rates change.
Pro tip: Payroll software can keep tax tables current, so you don’t have to worry about using outdated calculations.
Employment insurance premiums
Canada’s employment insurance deductions contribute to supporting individuals when there’s an interruption in their work. This can be because of job separation, parental leave, caregiver benefits, and sick benefits. Unless an employee is exempt, you deduct EI from each pay cheque. In addition, employers contribute 1.4 times the amount of EI premiums deducted from an employee’s remuneration.
Did you know: If you provide your employees with a wage loss replacement plan for short-term disability, you can request to reduce your EI rate through Employment and Social Development Canada (ESDC). Check out What is the EI Premium Reduction Program.
Canada Pension Plan (CPP) contributions
CPP contributions are a mandatory payroll deduction unless the employee is exempt. Employers match them dollar for dollar. In return, the CPP retirement pension replaces part of an employee’s income when they retire.
CPP has two levels of contributions:
- CPP: applies to earnings up to the Year’s Maximum Pensionable Earnings (YMPE).
- CPP2: applies to earnings above the YMPE, up to a second ceiling called the Year’s Additional Maximum Pensionable Earnings (YAMPE).
Also, both ceilings change each year. CRA lists the current rates, maximums and exemptions. To learn more, read our small business guide to CPP2.
Québec payroll deductions
Québec employers deduct amounts for both Québec and the federal government. As a result, they send deductions to two different places.
Remit to Revenu Québec:
- QPP contributions (Québec Pension Plan, instead of CPP), administered by Retraite Québec
- Parental insurance premiums under the Québec Parental Insurance Plan (QPIP)
- Provincial income tax for Québec
Remit to the CRA:
- Employment Insurance (EI) premiums
- Federal income tax
Because QPIP covers parental benefits, Québec employees pay a reduced EI rate.
Health benefits
Health insurance
Health insurance covers medical, dental, and/or vision care. If employees pay part of the premium for a private plan, you deduct it from their pay. Participation is often voluntary, though some employers make it a condition of employment.
Short-term and long-term disability
Short-term and long-term disability coverage ensures employees receive a percentage of their salary or wages (typically 60%-85%) in the event of an accident or illness that leaves them unable to work, either temporarily or permanently. You use this deduction to collect employee premiums for this coverage.
Life insurance policies
Life insurance
Use this deduction if you provide life insurance coverage and your employees have signed up for basic term life insurance through the workplace. You deduct the premiums from the employee’s pay, unless you pay them on the employee’s behalf.
Supplemental life insurance
Supplemental life insurance adds onto the base life insurance policy provided through the company and cannot exist without the life insurance premium. If your employees opt into additional life insurance coverage through your plan, you’d use this deduction.
Dependent life insurance
Employees can opt into dependent life insurance to provide coverage for a dependent spouse or child. If your employee is paying for this additional coverage, you can use this deduction type to deduct the premiums directly from an employee’s payroll.
Accidental death & dismemberment (AD&D)
AD&D, sometimes called accident insurance, pays out if an accident causes an employee’s death or the loss of a body part or function, such as loss of sight.
It doesn’t replace life insurance. Beneficiaries may receive an AD&D payment in addition to a life insurance benefit.
Note: Depending on the life insurance policy, your employees may only see a single deduction labelled something like “group benefits” or “insurance premiums” on their pay stubs. Even though the individual types are distinct from one another, employers often combine them on pay statements for simplicity.
Garnishments
Garnishments
You deduct a garnishment from an employee’s pay when they owe a debt they’re legally required to repay. This can be through a court order, a provincial family support order, or a requirement to pay from the CRA. Deductions continue until the debt is paid or other arrangements are made.
Retirement
Registered Retirement Savings Plan (RRSP)
Employees can put aside money for retirement through a Registered Retirement Savings Plan, commonly referred to as an RRSP. Use this deduction if employees contribute to their RRSP directly from their pay cheques.
Registered Pension Plans (RPP)
A Registered Pension Plan is another way for employees to save for retirement. An employer or union sets it up and pays employees a pension through periodic payments. The employer contributes, and in many plans the employee does too.
Other withholdings
Profit sharing
Profit sharing gives employees a chance to invest in the company’s financial success and can be a great incentive for retention. Employee profit sharing plans (EPSPs) are an arrangement where the employer shares profits with employees or a designated group of employees.
In a nutshell, the employer pays contributions to a trustee, who invests them for the plan’s beneficiaries, including employees.
Union dues
Use this deduction to hold back membership fees for employees who must pay union dues.
Union fringe deductions
Use this deduction when employees pay for extra benefits offered through their union.
Managing payroll deductions
Managing all these deductions can feel overwhelming. Each one has its own calculation, and not every deduction applies to every employee.
The CRA’s Payroll Deductions Online Calculator can help, but working through it one employee at a time may not be the most efficient option for your team.
Payroll software like Wagepoint calculates deductions for you. You can set up employee profiles so the right deductions apply automatically, giving you an ongoing record of each employee’s deductions.
Easier deducting starts now
Having an understanding of payroll deductions will help make working with them easier. Using tools to manage payroll deductions will make it easier still for you and your employees, and helps you stay on top of payroll compliance and pay your employees accurately.
Now that you know about payroll deductions, read about your payroll remittance schedule.
Disclaimer: The content we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals and should not be taken as legislative advice.
