Payroll Tax vs. Income Tax — How They Work for Canadian Payroll

This post is about income taxes in Canada. For the American version, click here.
Updated January, 2022. 

Payroll tax and income tax. These two short, simple words are the source of so many payroll questions (and confusion). It’s really no wonder because as laypeople, we hear or read “income tax” — we think personal income tax or possibly business income tax.

Payroll taxes, on the other hand, are often an unknown and rather eye-opening responsibility of any business paying employees in Canada.

The relationship between payroll tax and income tax.

In the context of a small business acting as the employer paying employees, income tax is a type of deduction that the employer must withhold (take out) of each pay cheque.

As well as withholding income tax, Canadian employers must also deduct Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums and any applicable provincial employer taxes (source deductions).

Together — income tax, federal taxes and provincial taxes — are all grouped under the bucket category of payroll taxes (employer taxes and/or source deductions). If you want to speak Canada Revenue Agency (CRA), the phrase is employer deductions and remittances.

What are my income tax responsibilities as a Canadian employer?

As an employer in Canada, you must deduct (withhold) the proper income tax amount every time you pay an employee. In addition to federal income tax, you must also withhold provincial and territorial income taxes in the provinces and territories where you pay employees.

Employers only need to withhold income tax for employees. When you pay contractors, the contractor is responsible for managing their income tax amounts.

👉 Note: If you’re a sole proprietor, the rules are a little different as you’re both the employer and the employee. You can learn more about that here. 

What do you do with the money you withhold for federal and provincial income tax?

Good question. The answer is don’t keep it or treat it like a short-term loan. These funds must be remitted (paid) to the CRA on a regular basis, usually monthly or quarterly and often by the 15^th of each month or quarter. The timing of your payments to the CRA is called your withholding schedule.

If you do your small business payroll manually, without using software, you are responsible for every step of the process from calculating withholding amounts to managing remittances. However, when you use self-service payroll software, like Wagepoint, you can automate a majority of this process, including your remittances.

How do I know how much income tax to withhold for each employee?

The sources that determine the amount of income tax an employer withholds are the CRA payroll deduction tables and each employee’s TD1 form.

The payroll deduction tables help you determine the amount of federal and provincial/territorial income tax to deduct each pay period. (Note: These tables do not include income tax calculations for Quebec) These same tables contain the rates for CPP contributions and EI premiums. (You see how this all starts fitting together?)

An employee’s federal and provincial TD1 forms tell you the number of federal and provincial/territorial deductions claimed. (Each is a separate form.)

👉 Note: Starting January 1, 2019, there will be a graduated increase in CPP contribution rates. You can learn more about this here. 

How does the CRA know who my business is?

When you register your business with the CRA, you’re issued a unique 9-digit business number. Then you have to register for a program account, for payroll you need a payroll deductions (RP) account (also known as a payroll program account). Your business number plus your payroll program account are the things that tell the CRA who you are.

👉 For information on registering your business with provincial and territorial payroll tax authorities, see this page.

So, the CRA groups income tax and payroll taxes together?

Yes, they do. In Canada, the CRA is the mothership for income taxes and payroll taxes. The Employers’ Guide to Payroll Deductions and Remittances is a comprehensive reference resource. Within the deduction tables, there’s also a payroll deductions online calculator (PDOC).

👉 Again, this is stuff that’s a ton easier when you use software. Here’s more information on payroll deductions and payroll contributions. 

How are other payroll taxes different than income taxes in Canada?

As a Canadian employer, you also have to account for EI and CPP — along with any provincial and territorial requirements. While income tax only requires the employer to withhold amounts from an employee’s pay, EI and CPP require employer contributions (amounts paid by the employer). Here’s how this works:

• CPP — the employer must match the amount deducted from the employee’s pay cheque.
• EI — the employer pays 1.4X the amount withheld from the employee’s pay cheque.

A breakdown of Canadian payroll taxes by province and territory.

The table below provides links to the federal and provincial or territorial taxes that fall under the umbrella of payroll taxes — as well as how each tax is automated within Wagepoint.

Written by Michelle Mire

Formerly Wagepoint's Content Manager, Michelle enjoys simplifying complex payroll topics and creating engaging small business and partner content. When not at the keyboard, she enjoys chocolate, running and quality television (not always in that order).

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