The basics of employer payroll deductions

Payroll deduction amounts depend on the province or territory of employment

While federal income tax is the same across Canada, provincial and territorial tax rates vary.

It is therefore important to determine an employee's province or territory of employment to ensure you are deducting the right amounts. For example, if your employee lives in Ontario but works at your New Brunswick facility, you must use the payroll deduction tables for New Brunswick.

In Quebec, which administers its own pension plan, the situation is somewhat different for employers.

• The Québec Pension Plan replaces the Canada Pension Plan.
• The employer must contribute to the Québec Parental Insurance Plan.
• The provincial income tax for Quebec is remitted to Revenu Québec.
• Employment Insurance is withheld at a lower rate.

You can find the payroll deductions tables by province on the CRA website.

Steps for new employers

New employers must first open a payroll program account in order to remit deductions to the CRA.

Next, the employer will have to ask the employee to provide his or her social insurance number and complete Form TD1—Personal Tax Credits Returns.

Payroll deductions belong to the government, and the amounts collected must be kept separate from the operating capital of your business. These amounts must not be included in assets under liquidation, assignment, receivership or bankruptcy. It is strongly recommended that all amounts withheld be deposited into a separate bank account until it's time to remit them.

At the end of the year, you must file a summary of all employees' income and deductions. You must report each employee's income and deductions on an appropriate T4 or T4A slip. You will provide two copies to your employee, keep one for your records, and send a copy of the T4/T4A slips for all your employees to the CRA. These must be received by the last day of February of the following year to avoid penalties.

How much do you have to deduct?

Payroll deductions are calculated for each pay period. To help you, the CRA website provides an online calculator that can be used to calculate federal, provincial and territorial payroll deductions. You can also use it to calculate the required deductions for Quebec, such as the Québec Pension Plan and Employment Insurance at the prescribed rate for Quebec.

Below are examples of payroll deduction rates that applied for 2021.

Maximum thresholds apply. For example, the employer's maximum annual Employment Insurance premium was $1,245.36 in 2021, except in Quebec, where the maximum was $930.08.

How often are deductions remitted to the governments?

The frequency of payments to the governments varies. Payments may be submitted monthly (on the 15th day of the following month) or quarterly (on the 15th of January, April, July and October). The employer can also make accelerated remittances, up to two or four times a month.

Do I have to withhold deductions if I pay myself a salary?

If the business is a sole proprietorship or partnership, deductions will not be sent to the CRA via the payroll account. For these businesses, payments are made when the T1 income tax and benefit return is filed, unless the sole proprietor or partner is required to pay by instalments.

For entrepreneurs employed by their incorporated business, their salary will be treated as employment income and deductions will be required. If the entrepreneur controls more than 40% of the common shares (with voting right), he or she is exempt from Employment Insurance premiums and will not be entitled to Employment Insurance benefits. However, there are Employment Insurance special benefits for self-employed people.

What happens if you don't make payroll deductions?

Employers who fail to withhold the required contribution amounts or to remit the amounts they have deducted from their employees' pay should beware.

The CRA could impose a penalty equal to 10% of the amount required for the Canada Pension Plan, Employment Insurance or income tax that you should have withheld.

If you are subject to this penalty more than once in the same calendar year, the CRA will charge a 20% penalty if the failure was voluntary or in circumstances that amount to gross negligence. If an employer does not withhold deductions, or if it makes deductions but does not remit them, it becomes liable for the amount that should have been remitted.

The CRA can go as far as taking legal action, such as garnishing your salary or other sources of income or seizing and selling property.

You can find more information on this topic on the CRA website. The CRA also offers a Liaison Officer service to help employers improve their understanding of their payroll deduction and income tax obligations.