Payroll Deductions

Income tax: the biggest line

The largest deduction for most employees is income tax, federal and provincial combined, withheld from every pay and remitted on your behalf. The amount is driven by the TD1 forms you complete when you start a job, one federal and one provincial, which tell payroll which personal tax credits to build in. Withholding is only an estimate of the tax on your taxable income: file your return and the difference becomes a refund or a balance owing. If your situation changes, a second job, a new dependant, updating your TD1 keeps the estimate honest.

CPP and EI: the statutory pair

Next come the two national programs. CPP contributions are deducted on earnings above a small basic exemption, up to an annual ceiling, and since the CPP enhancement there is a second contribution on a band of earnings above the traditional ceiling. Rates and ceilings adjust every year; see those two articles for the current figures.

Employment Insurance premiums are the third statutory line: a small percentage of insurable earnings up to an annual maximum, with your employer paying more than you do. Workers in Quebec generally pay a somewhat lower EI rate and see an extra line for QPIP, the province's own parental insurance plan, which covers maternity and parental benefits there instead of EI.

Voluntary deductions

Everything else on the stub is there because you, or your union, agreed to it:

• Group RRSP or pension contributions. Often matched by the employer, and usually deducted before tax is calculated, so the tax relief of an RRSP contribution arrives on every paycheque instead of at filing time.
• Benefits premiums. Your share of the health, dental, disability, and life insurance coverage in the group plan.
• Union dues and professional fees. Deducted at source and claimable on your tax return.

The employer side of the ledger

Your deductions are only half the story. For every dollar of CPP you contribute, your employer contributes a dollar too, and for EI the employer pays 1.4 times your premium. The employer then bundles its share, your share, and your withheld income tax, and remits the whole amount to the CRA on a fixed schedule, monthly for most small employers and more frequently for large payrolls.

Source deductions are trust monies: from the moment they come off your pay, the employer is holding them for the CRA, not using them. Spending remittances to cover a cash crunch is not a financing decision, it is a serious compliance failure. Unremitted source deductions carry a deemed trust that ranks ahead of most other creditors, and directors of a corporation can be held personally liable, one of the few business debts that incorporation does not shield them from.

Why your January paycheque feels smaller

CPP and EI deductions stop for the year once you reach the annual maximums. For higher earners that happens between summer and late fall, and take-home pay quietly rises for the rest of the year. Then January arrives, the counters reset to zero, deductions restart at full strength, and the deposit drops back to its early-year level. Nothing is wrong and nobody cut your pay: you simply got used to the fourth-quarter version of your salary.

Your paystub and the T4

Each stub shows the current pay period plus year-to-date totals for every deduction. In February, your T4 slip summarizes the year, employment income, income tax deducted, CPP contributions, and EI premiums, and those figures should match your final December stub's year-to-date column, plus any year-end taxable benefits. Quebec employees also receive an RL-1 slip reporting the provincial side to Revenu Québec. A five-minute reconciliation each February catches payroll errors while they are easy to fix.

If you are self-employed

Run your own sole proprietorship and none of this machinery exists: no withholding, no employer share, no automatic anything. You pay income tax through quarterly instalments, cover both halves of CPP yourself, and pay no EI at all unless you opt into the special benefits program. The freedom of an unwithheld invoice is real, and so is the tax bill that follows it: the discipline payroll imposes on employees, you have to impose on yourself.