Payroll deductions are amounts taken 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.
What are pre-tax and post-tax deductions?
Some payroll deductions are taken before certain taxes are calculated, while others are taken after taxes have been applied. Whether a deduction is pre-tax or post-tax depends on the type of deduction and applicable payroll rules.
Some examples of pre-tax deductions include:
- Income tax
- CPP
- Employment Insurance (EI)
Some examples of post-tax deductions include:
- Union dues
- Garnishments
- Savings plans
Because this can vary by deduction type and jurisdiction, employers should confirm how each deduction should be treated before processing 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.
- Calculate statutory deductions: Withhold required amounts like CPP contributions, EI premiums, and income tax.
- Apply other deductions: Deduct any authorized benefits, retirement contributions, union dues, garnishments, or other applicable withholdings.
- Pay the employee’s net pay: After deductions are withheld, the remaining amount is paid to the employee.
- Remit source deductions: Send required deductions to the CRA, or Revenu Québec for Québec payroll where applicable, by the correct deadline.
- Keep payroll records: Make sure deductions are shown clearly on employee pay statements and recorded for reporting, remittances, and year-end forms.
Common types of payroll deductions
Statutory payroll deductions in Canada
Statutory deductions are payroll deductions employers are required to withhold by law. For most Canadian employers, the main statutory deductions are CPP contributions, EI premiums, and income tax.
Employers are responsible for calculating these amounts, withholding them from employee pay, and remitting them to the CRA by the required deadline.
Income tax
Income tax refers to the federal and provincial taxation on employee earnings. Income can come in many different forms, such as employment income, investment income, commission income, and retirement income.
The tax system for both levels of government works on a graduated or progressive basis. What this means is when someone earns more money, they pay more in taxes based on income brackets determined at the federal and provincial levels.
Keep in mind that the federal and provincial or territorial levels have their own tax rates. For provincial income tax, knowing which applies to your employee depends on their province or territory of employment rather than where they live. When you’re not sure, the CRA can provide a proper ruling to determine which province or territory to use.
The rates for these taxes are updated biannually through calculations referred to as tax tables.
Pro tip: Payroll software can update tax tables so you don’t have to worry about using the wrong 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, this is deducted from each pay cheque. Employers are required to 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) base contributions
Commonly referred to as CPP, Canada Pension Plan deductions are another mandatory payroll deduction, unless the employee is exempt. This deduction is collected over time for when an individual retires and is matched dollar-for-dollar by the employer.
This taxable benefit replaces a portion of their income when they retire and continues for the rest of their life.
Note: Québec uses the Québec Pension Plan (QPP) rather than CPP.
CPP first additional contributions
In 2019, the government introduced CPP first additional contributions. These take effect after base contributions, up to the Year’s Maximum Pensionable Earnings (YMPE). Also called the first earnings ceiling, this was set by the CRA and changes annually. Employers also match these contributions.
CPP second additional contributions (CPP2)
CPP second additional contributions, also called CPP2, CPP enhancement, and second additional CPP, was introduced in 2024. This applies to income above the YMPE and up to the Year’s Additional Maximum Pensionable Earnings (YAMPE). This second earnings ceiling was also set by the CRA and changes annually. CPP2 is another employer-matched contribution.
Read our small business guide to CPP2 to learn more about the difference between these CPP contributions.
Employer responsibilities for payroll deductions
Before moving into other types of payroll deductions, it’s worth clarifying what employers are responsible for once deductions are calculated.
Health benefits
Health insurance
Health insurance covers medical, dental, and/or vision health. These private plan premiums are voluntary deductions, meaning employees must opt in to receive any workplace health benefits.
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. This deduction type would be used to collect employee premiums towards this insurance.
Life insurance policies
Life insurance
This deduction is used if an employer provides life insurance coverage, and your employees have signed up to receive basic term life insurance protection through the workplace. The premiums associated with the coverage are deducted from an employee’s pay, unless the employer is paying the premiums on behalf of the employee.
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, offers specific coverage for specific circumstances. It’s used for instances where an accident (such as a workplace accident) has caused the employee to die or lose a body part or function of a body part (such as loss of sight).
It doesn’t replace life insurance. In fact, it’s known as a “double indemnity” insurance because beneficiaries could receive a payment from AD&D as well as the 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, they’re often lumped together for simplicity on payroll statements.
Garnishments
Garnishments
Otherwise known as Wage Garnishments, garnishments are a deduction type that is used if an employee is required to pay a debt as a result of a court order. The garnishment is deducted directly from an employee’s pay cheque until the entire debt is paid off or alternative arrangements to pay the debt have been made through the court by the employee.
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. This deduction type would be used to manage employee contributions if the amounts are being deducted directly from their pay cheques.
Registered Pension Plans (RPP)
This is another option for employees to put aside money for their retirement. Arranged by an employer or a union, a Registered Pension Plan provides a pension to employees via periodic payments. Both the employer and employee contribute to these plans.
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, contributions are paid to a trustee and that trustee invests for the benefit of the beneficiaries of the plan, including the employees.
Union dues
This deduction is used to hold back membership fees for unionized employees required to pay membership dues to the union.
Union fringe deductions
These are additional benefits provided through the union that are deducted from a union employee’s cheque.
Managing payroll deductions
Thinking about managing all these payroll deductions might feel overwhelming. After all, it’s not just a matter of different calculations and applications of these deductions, but also the fact that they’re not going to all apply to every employee.
While the CRA has tools like the Payroll Deductions Online Calculator to help you make calculations this tool might not be the most efficient for you and your team.
Payroll software, like Wagepoint, automates the calculations, remittances, and payments payroll deductions while remaining compliant. You can set up employee profiles so certain deduction types apply to them automatically.
This means you don’t have to go through the process manually and you’ll have an on-going record of employee deductions right at your fingertips.
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, all while maintaining payroll compliance and paying 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
