Payroll Deductions in Canada: What Employers Must Withhold and Remit
Summary: Payroll deductions are one of the key responsibilities of employers in Canada. Businesses must withhold CPP, EI, and income tax from the employees and remit those amounts to the CRA. Understanding payroll deductions, remittance schedules, and common payroll mistakes can help businesses avoid penalties, interest charges, and payroll errors.
Every employer in Canada is responsible for withholding and remitting payroll deductions. When a business pays employees, it must withhold CPP contributions, EI premiums, and income tax from every paycheque and remit those amounts to the Canada Revenue Agency (CRA).
Delayed remittances can lead to penalties and interest charges, while unremitted payroll deductions may create personal liabilities for company directors. Understanding the rules will help employers avoid making costly mistakes.
What are Payroll Deductions (Source Deductions)?
Payroll deductions, also known as source deductions, are the amounts withheld from an employee’s paycheque before they are paid. They are called source deductions because the amount is deducted at the source, that is, before the employee gets paid.
Canada has three mandatory payroll deductions: CPP contributions, EI premiums, and income tax. Employers must withhold these amounts from employees’ salaries and remit them to the Canada Revenue Agency (CRA).
Employees contribute CPP and EI through payroll deductions. Employers also contribute their share of CPP and EI and remit both amounts to the CRA.
CPP Contributions: 2026 Rates and Limits
The Canada Pension Plan (CPP) helps provide retirement income for workers in Canada. Both employers and employees contribute to CPP through payroll deductions, and contribution limits are adjusted annually — see our breakdown of CPP and EI maximums for 2025 for year-over-year context.
CPP Figure (2026) | Amount |
Employee Contribution Rate | 5.95% |
Employer Contribution Rate | 5.95% |
Year’s Maximum Pensionable Earnings (YMPE) | $74,600 |
Basic Exemption | $3,500 |
Maximum Annual Employee Contribution | $4,230.45 |
Maximum Annual Employer Contribution | $4,230.45 |
CPP contributions apply to eligible earnings above the $3,500 basic exemption, up to the annual earnings limit. Employers must contribute an equal amount as employees. Once the annual maximum contribution limit is reached, CPP deductions stop for the rest of the year.
What is CPP2?
CPP2 is an additional CPP contribution for higher-income employees. In 2026, it applies to income between $74,600 and $85,000. Employers must match CPP2 contributions, just as they do with regular CPP contributions.
Many employers are familiar with CPP but may not realize that CPP2 applies once an employee’s income exceeds the regular CPP limit.
EI Premiums: 2026 Rates and Limits
Employment Insurance (EI) is an insurance program that provides temporary income support for eligible workers who lose their jobs or take certain types of leave. Both employers and employees contribute to EI through payroll contributions, similar to how CPP contribution maximums are set each year by the CRA.
EI Figure (2026) | Amount |
Employee EI Rate | 1.63% |
Maximum Insurable Earnings | $68,900 |
Maximum Employee Premium | $1,123.07 |
Employer Multiplier | 1.4x |
Maximum Employer Premium | $1,572.30 |
EI deductions continue until the employee reaches the maximum annual contribution for the year. Once the limit is reached, the EI deductions stop for the rest of the year.
Employees in Quebec contribute to the Quebec Parental Insurance Plan (QPIP), which has a lower EI rate.
Income Tax Withholding
Employers have to withhold income tax in addition to CPP and EI from employee pay and remit it to the CRA, based on the federal tax brackets in effect for the year. The amount withheld depends on the employee’s income, tax credits, and the province of employment.
2026 Federal Tax Brackets
Taxable Income | Federal Tax Rate |
Up to $57,375 | 15% |
$57,376 to $114,750 | 20.5% |
$114,751 to $177,882 | 26% |
$177,883 to $253,414 | 29% |
Over $253,414 | 33% |
The income tax includes provincial tax on top of federal tax. For payroll, the province of employment is used to calculate tax deductions, not where the employee lives or where the company is headquartered.
The CRA’s Payroll Deductions Online Calculator (PDOC) is the easiest way to calculate payroll tax deductions. This calculator determines the correct amount of federal and provincial tax to withhold based on the employee’s information.
The TD1 Form
Every new employee needs to complete a federal TD1 form before they receive their first paycheque. Depending on the province of employment, they’ll also need a provincial or territorial TD1.
The TD1 form helps employers determine how much income tax to deduct from an employee. Employees are required to update their TD1 if their personal credit amount changes during the year.
If employees do not provide a TD1 form, employers generally use the default tax credit amount when calculating tax deductions. Employers should collect the employee TD1 forms on file in case CRA requests them during a payroll review or audit, as part of broader payroll record-keeping requirements in Ontario.
What It Actually Costs the Employer Beyond the Paycheque
An employee’s salary is only part of the cost of employment. Employers are also responsible for several payroll-related costs that do not appear on employees’ pay stubs.
Employer Cost | Description |
CPP | Employers contribute the same CPP amount as the employee |
CPP2 | Employers match CPP2 contributions when applicable |
EI | Employers pay 1.4 times the employee’s EI premium |
WSIB (Ontario) | Workplace insurance premiums may apply, depending on the business and industry |
EHT (Ontario) | Employer Health Tax may apply to larger Ontario employers |
Hiring new employees costs more than just their salary. Employers should also account for CPP, CPP2, EI, and other payroll-related costs when budgeting for new hires.
CRA Remittance Schedule: When to Send It
Employers must send payroll deductions to CRA on a set schedule. The schedule is determined by CRA based on the amount of payroll deductions the employer remits, and ties into broader year-end payroll obligations like T4 preparation.
Remitter Type | Average Monthly Withholding Amount (AMWA) | Due Date |
Regular (Monthly) | Less than $25,000 | 15th day of the following month |
Quarterly (For eligible employers) | AMWA less than $3,000, and MWA less than $1,000 | 15th day after the end of each quarter |
Accelerated Threshold 1 | $25,000 to $99,999 | Twice per month |
Accelerated Threshold 2 | $100,000 or more | Up to four times per month |
New employers start as monthly remitters. The CRA may change the remittance schedule as payroll deductions increase or decrease. Employers do not choose their remitter type.
5 Payroll Mistakes that Trigger CRA Penalties
Late or Missed Remittances
Missing a remittance deadline can result in CRA charging penalties and interest, even if the payment is only a few days late.
Misclassifying Employees as Contractors
Many businesses use contractors to simplify payroll. However, if the CRA determines during a review or an audit that a contractor should have been classified as an employee, then the employer is responsible for missed payroll deductions. Contractors themselves remain responsible for their own filings under our self-employed tax filing guide.
Missing CPP2 Deductions for Higher Earners
CPP2 applies to employees whose income exceeds the regular CPP limit. It often gets overlooked during payroll, as it only affects high-income earners.
Not Collecting or Updating TD1 Forms
The TD1 form helps determine what income tax is deducted from an employee. Missing or outdated TD1 forms can result in incorrect payroll deductions.
Exclude Taxable Benefits from Payroll Calculations
Some employee benefits are considered taxable by the CRA and must be included in payroll calculations. Overlooking taxable benefits can result in incorrect payroll deductions.
How One Accounting Can Help
Managing payroll requires more than just paying employees. Employers must calculate payroll deductions correctly, remit them to the CRA on time, and prepare year-end T4 slips.
One Accounting helps businesses across Toronto, Mississauga, Hamilton, Burlington, and Calgary manage payroll deductions, remittances, and T4 preparation. Getting payroll right helps avoid penalties, corrections, and unnecessary CRA follow-up.
Book a free consultation to discuss your payroll needs.
Frequently Asked Questions
What are the three mandatory payroll deductions in Canada?
The three mandatory payroll deductions in Canada are Canada Pension Plan (CPP), Employment Insurance (EI), and Income tax. Employers withhold these amounts from employee pay and remit them to CRA on their assigned remittance schedule.
What happens if I miss a CRA remittance deadline?
If you miss a remittance deadline, the CRA may impose penalties and interest. The longer the delay, the higher the potential penalty.
How much does payroll actually cost an employer above salary?
Employers have costs that don’t show up on a salary slip, such as CPP contributions, CPP2 contributions (where applicable), and EI premiums. In some provinces and businesses, employers also have to contribute to WSIB or Employer Health Tax Obligations.
What is the difference between CPP and CPP2?
CPP applies to employees who earn up to the limit of $74,600. CPP2 applies to high-income earners who earn between $74,600 and $85,000. Employers need to match the employee contribution as with the CPP contribution.
Do independent contractors receive payroll deductions?
For independent contractors, employers need not withhold CPP, EI, and income tax, as contractors are responsible for managing their own tax obligations. However, if the CRA determines during an audit or review that the contractors should be classified as employees, then the employer may be responsible for missed payroll deductions.
Conclusion
Managing payroll obligations is a key responsibility of every employer in Canada. Mistakes or delays in remittances can lead to penalties, interest charges, and additional CRA follow-ups.
If you need help managing payroll, One Accounting provides payroll services across Toronto, Mississauga, Hamilton, Burlington, and Calgary. Book a free consultation to discuss your payroll needs.
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