Payroll Deductions Canada — CPP | EI | Income Tax Explained

Canadian payroll deductions consist of three mandatory source deductions withheld from every employee’s pay: CPP (Canada Pension Plan) contributions at 5.95% of pensionable earnings, EI (Employment Insurance) premiums at 1.66% of insurable earnings, and federal + provincial income tax based on TD1 claim codes and CRA tax tables. Employers also contribute their own share of CPP (equal to employee) and EI (1.4x employee). Use CRA’s free Payroll Deductions Online Calculator (PDOC) to calculate exact deductions for any pay period.

In This Guide:

• 1. What Are Payroll Deductions in Canada?
• 2. CPP (Canada Pension Plan) — Rates, Limits & Calculation
• 3. EI (Employment Insurance) — Rates, Limits & Calculation
• 4. Income Tax Withholding Canada — Federal & Provincial
• 5. TD1 Form — What It Is and Why It Matters
• 6. Employer Payroll Obligations — Your Share of CPP & EI
• 7. How to Calculate Payroll Deductions — Step by Step
• 8. Payroll Deductions for Part-Time, Casual & Seasonal Workers
• 9. How DKP Global Manages Payroll Deductions
• 10. Frequently Asked Questions (10 Q&As)

What Are Payroll Deductions in Canada?

Payroll deductions also called source deductions are amounts an employer is legally required to withhold from an employee’s gross pay before issuing the net paycheque. These deductions are then remitted to the Canada Revenue Agency (CRA) on the employee’s behalf. They are not optional every Canadian employer with at least one employee must calculate and remit source deductions.

There are three mandatory payroll deductions in Canada: CPP contributions, EI premiums, and income tax. A fourth RPP (Registered Pension Plan) contributions is optional and only applies when the employer has a registered pension plan. Each deduction serves a different purpose:

• CPP — funds Canada’s public pension system. Employees accumulate pension credits used to calculate their retirement CPP benefit.
• EI — funds employment insurance benefits. Employees who lose their job, take parental leave, or are sick may claim EI benefits.
• Income tax — federal and provincial income tax collected at source throughout the year, reducing the employee’s tax balance due at T1 filing time.

For Indian immigrant business owners unfamiliar with the Canadian payroll system, the key difference from India’s TDS framework is that Canadian payroll deductions cover all three components pension, employment insurance, and income tax in a single monthly remittance to CRA. There is no separate quarterly filing as in India; the obligation is monthly and the penalties for missing the 15th-of-the-month deadline are immediate and steep.

CPP (Canada Pension Plan) — Rates, Limits & Calculation 2026

CPP is a mandatory pension contribution for most Canadian employees between ages 18 and 70. Both the employee and the employer contribute equal amounts. Here are the 2026 CPP rates and thresholds:

CPP Component	2026 Rate / Amount	Notes
Basic exemption (annual)	$3,500	First $3,500 of earnings are exempt from CPP — no contribution on this amount
Year’s Maximum Pensionable Earnings (YMPE)	$71,300	CPP is calculated on earnings between $3,500 and $71,300
Employee CPP1 contribution rate	5.95%	Applied to pensionable earnings (gross pay minus $3,500 basic exemption per year)
Maximum employee CPP1 contribution (annual)	$4,034.10	Cannot exceed this amount regardless of earnings above YMPE
Employer CPP1 contribution rate	5.95%	Employer matches employee CPP1 exactly — same amount
Maximum employer CPP1 contribution	$4,034.10	Same cap as employee contribution
CPP2 — Second Additional CPP (employee)	4.00%	Applied on earnings between $71,300 and $81,900 (Year’s Additional Maximum Pensionable Earnings)
Maximum CPP2 contribution (annual)	$428.00	Only affects higher-earning employees
CPP2 — Employer contribution	4.00%	Employer also matches CPP2 — same rate and maximum as employee
Employees exempt from CPP	—	Employees under 18, over 70, or receiving a CPP/QPP disability pension may be exempt

Per-pay-period CPP calculation: (Gross pay for the period − Basic exemption for the period) × 5.95%. The basic exemption per period depends on pay frequency for bi-weekly pay: $3,500 ÷ 26 = $134.62 per period. Use CRA’s PDOC calculator to get exact figures for each employee each pay period. DKP Global cross-checks all CPP calculations using both payroll software and PDOC before remitting.

EI (Employment Insurance) — Rates, Limits & Calculation 2026

EI premiums fund the Employment Insurance program providing income replacement when employees lose their job, take parental/maternity leave, or are ill. Unlike CPP, EI rates are the same across Canada (except Quebec which has its own QPIP system for parental benefits).

EI Component	2026 Rate / Amount	Notes
Maximum Insurable Earnings (MIE)	$64,900 annually	EI is calculated on gross earnings up to this annual threshold
Employee EI premium rate	1.66% of insurable earnings	Applied to all insurable earnings up to MIE
Maximum employee EI premium (annual)	$1,077.48	Once an employee reaches this maximum, no further EI is deducted for the year
Employer EI premium rate	2.324% (1.4× employee rate)	Employers pay 1.4x the employee EI rate — this can be reduced with an approved wage loss replacement plan
Maximum employer EI contribution (annual)	$1,508.47	Employer’s maximum annual EI cost per employee
Quebec employee EI rate	1.31% (reduced)	Lower because Quebec operates separate QPIP for parental benefits
Quebec employer EI multiplier	1.4× the Quebec employee rate	Same multiplier — applies to the lower Quebec base rate
EI exemptions	Owner-operators, certain family members	Incorporated business owners can elect to exclude themselves from EI

Per-pay-period EI calculation: Gross pay for the period × 1.66% (up to the annual maximum). Unlike CPP, there is no basic exemption EI applies from the first dollar of insurable earnings. Once an employee reaches the annual maximum of $1,077.48, no further EI is deducted for the remainder of the calendar year. Payroll software tracks this automatically; manual payroll requires close monitoring in December.

Income Tax Withholding Canada — Federal & Provincial

Income tax withholding is the most complex of the three payroll deductions because it depends on each employee’s personal tax situation their TD1 claim amounts, pay frequency, province of employment, and any additional tax they have requested to have withheld. Here are the 2026 federal income tax brackets:

Federal Tax Bracket	Taxable Income Range	Federal Tax Rate
Bracket 1	$0 – $57,375	15%
Bracket 2	$57,376 – $114,750	20.5%
Bracket 3	$114,751 – $158,519	26%
Bracket 4	$158,520 – $220,000	29%
Bracket 5	Over $220,000	33%

Provincial income tax is added on top of federal tax each province has its own rate structure. Combined federal + provincial rates for a typical small business employee earning $80,000 in Ontario are approximately 31.48%; in BC approximately 28.20%; in Alberta approximately 30.50%. The employer withholds both federal and provincial income tax through a single payroll deduction — remitted together to CRA (except Quebec which is remitted separately to Revenu Quebec).

Income tax withholding is calculated using CRA’s official payroll deductions tables or the PDOC calculator manual calculation is not recommended due to the complexity of personal amounts, claim codes, and mid-year adjustments.

TD1 Form What It Is and Why It Matters

The TD1 (Personal Tax Credits Return) is a form every employee must complete when starting a new job. It tells the employer how much income tax to withhold from each paycheque. The TD1 captures the employee’s personal tax credit claims the higher the claimed amount, the less income tax is withheld per pay period.

There are two TD1 forms every new employee must complete:

• Federal TD1 — captures federal personal amounts: basic personal amount ($16,129 for 2026), age amount (if over 65), disability amount, caregiver amount, tuition, and others
• Provincial TD1 — captures provincial personal amounts specific to the province of employment (e.g. Ontario TD1ON, BC TD1BC)

If an employee does not submit a TD1, the employer withholds income tax based on the basic personal amount only Claim Code 1. Employees can update their TD1 at any time during the year if their personal situation changes. An employee can also request additional tax be withheld above the calculated amount by noting it on the TD1.

For Indian immigrant employees who are new to Canada particularly those on work permits in their first year the TD1 claim amounts may be lower than for long-term residents because certain credits (tuition from foreign universities, spousal credits for a spouse still in India) may not be claimable in Canada. DKP Global advises all new employee clients on their TD1 completion to ensure correct withholding from day one.

Employer Payroll Obligations — Your Share of CPP & EI

Employer Obligation	Rate / Amount (2026)	Annual Max Per Employee	Notes
Employer CPP1 contribution	5.95% of employee pensionable earnings	$4,034.10	Equal to employee CPP — employer matches exactly
Employer CPP2 contribution	4.00% on earnings $71,300–$81,900	$428.00	Also matches employee CPP2
Employer EI contribution	2.324% of employee insurable earnings	$1,508.47	1.4× the employee EI rate
WSIB / WorkSafeBC premium	0.5%–8% of gross payroll (industry-based)	Varies by industry	Separate from CRA remittance — paid to provincial board
EHT (Ontario only — payroll > $1M)	Up to 1.95% of Ontario payroll	No cap	Employer-only tax — not deducted from employee pay
Group benefits premiums (if applicable)	Varies by plan	Varies	Employer share of group benefits is an employer cost — may create taxable benefit for employees

The true cost of hiring an employee in Canada is approximately 12–15% above the gross salary when you include the employer’s CPP and EI contributions. For a $60,000/year employee, the employer’s additional payroll tax cost is approximately $7,200–$9,000 per year. This is a critical planning figure for any business hiring its first employees DKP Global provides a full payroll cost analysis before each new hire.

How to Calculate Payroll Deductions — Step by Step

Step	What to Do	Example (Bi-weekly, $60,000 salary)
1	Determine gross pay for the period	$60,000 ÷ 26 pay periods = $2,307.69 gross pay
2	Calculate CPP deduction	($2,307.69 − $134.62 basic exemption) × 5.95% = $129.28 employee CPP
3	Calculate EI deduction	$2,307.69 × 1.66% = $38.31 employee EI
4	Determine income tax withholding	Use PDOC: input province (e.g. Ontario), pay period (bi-weekly), gross pay ($2,307.69), TD1 claim code → PDOC calculates federal + provincial tax. Example: ~$385.00
5	Calculate net pay	$2,307.69 − $129.28 (CPP) − $38.31 (EI) − $385.00 (tax) = $1,755.10 net pay to employee
6	Calculate employer CPP	Equal to employee CPP: $129.28
7	Calculate employer EI	$38.31 × 1.4 = $53.63 employer EI
8	Calculate total CRA remittance	$129.28 (emp CPP) + $129.28 (er CPP) + $38.31 (emp EI) + $53.63 (er EI) + $385.00 (income tax) = $735.50 total remittance to CRA

Always use CRA’s PDOC calculator for official calculations manually computed figures can differ due to rounding rules and mid-year threshold crossings. DKP Global runs every payroll through certified software with a PDOC cross-check before issuing payslips and submitting remittances.

Payroll Deductions for Part-Time, Casual & Seasonal Workers

The same payroll deduction rules apply to part-time, casual, and seasonal workers as to full-time employees. The deduction amounts are simply proportionally lower because the earnings are lower. Key considerations:

• CPP: Applied to pensionable earnings above the basic exemption. For very low earners or casual workers with short employment periods, CPP may be minimal or zero if earnings do not exceed the basic exemption for the periods worked.
• EI: Applied from the first dollar of insurable earnings no exemption. Part-time workers accumulate EI hours that may qualify them for benefits if they are laid off.
• Income tax: Applied based on annualized earnings and TD1 claims. A part-time worker earning $15,000/year pays proportionally less income tax than a full-time worker earning $60,000/year.
• Casual / day labour: Even a one-day casual worker is subject to CPP, EI, and income tax deductions if their earnings exceed the daily CPP exemption threshold. Many small business owners incorrectly pay casual workers cash without deductions — this is a CRA audit risk.
• Seasonal workers: Workers hired for a season are employees, not contractors, in most cases. Full payroll deduction rules apply. At season end, a Record of Employment (ROE) must be issued within 5 calendar days.

DKP Global advises on correct classification and deduction calculation for all worker types avoiding the most common and expensive payroll compliance errors that small businesses make.

9. How DKP Global Manages Payroll Deductions

DKP Global handles the complete payroll deduction cycle for every payroll client from new employee setup to monthly remittance to year-end T4 filing. Our process ensures zero errors and zero late remittances:

• New employee onboarding: Collect TD1 (federal + provincial), SIN, employment agreement, and pay rate. Set up employee profile in Xero or QuickBooks payroll.
• Every pay run: Calculate gross pay, CPP, EI, and income tax for each employee using PDOC-verified software calculations. Issue payslips.
• Monthly remittance: Calculate total employer remittance (employee CPP + EI + tax + employer CPP + EI). Submit to CRA by the 15th via My Business Account.
• Year-end: Prepare T4 slips for every employee. Complete T4 Summary. File by February 20 (8 days before the February 28 deadline).
• New hire advisory: For every new hire, DKP Global calculates the true all-in labour cost salary + employer CPP + employer EI + WSIB/WorkSafeBC + any benefits so you know the real cost before you hire.

For Indian immigrant business owners who are owner-employees of their own corporation, DKP Global also advises on the optimal salary structure how much salary to pay yourself to maximize CPP contributions and RRSP room, versus how much to take as dividends (which are not subject to payroll deductions). This salary-dividend mix decision is one of the most important annual tax planning decisions for incorporated Canadian business owners.

Need Help with Payroll Deductions in Canada? DKP Global calculates and remits CPP, EI, and income tax for all payroll clients across Canada. ACCA-UK & CS certified. 250+ businesses served. Zero errors, zero late remittances. 📅 Book Free 30-Min Consultation  |  📞 +1-672-833-4342  |  📧 info@dkpglobal.org  |  💬 WhatsApp → DKP Accounting & Payroll Services in Canada

Frequently Asked Questions – Payroll Deductions Canada