Payroll Deductions in Canada: CPP, EI and Income Tax

Payroll deductions in Canada are the amounts an employer withholds from an employee's pay — CPP contributions, EI premiums, and federal and provincial income tax — and sends to the Canada Revenue Agency (CRA). If you run a sole proprietorship and pay anyone a wage or salary, those amounts are not optional: you calculate them, withhold them, add the employer's share, and remit on the schedule the CRA assigns you. This guide explains what gets withheld, who pays what, and how the remittance and reporting cycle works today.

Payroll rules are federal, so CPP, EI and federal income tax withholding work the same in every province and territory. Provincial and territorial income tax is layered on top using separate formulas, and in Quebec provincial income tax is remitted to Revenu Québec rather than the CRA.

What Counts as a Payroll Deduction

Source deductions is the CRA's term for amounts withheld at source from an employee's pay. In everyday payroll you deal with three categories:

• Statutory deductions — CPP contributions, EI premiums and income tax. These are required by law and must be remitted to the CRA (or Revenu Québec for Quebec provincial tax).
• Plan-based deductions — group RRSP or pension contributions, extended health premiums and similar items. These apply only if a plan exists and the employee has agreed to participate.
• Court-ordered deductions — garnishments and family support orders, which must be followed exactly as directed.

Only the statutory amounts are payroll deductions in the tax sense, but the other items still need to be tracked, deducted and reported accurately on each pay run.

CPP, EI and Income Tax Withholding

Each statutory deduction works differently. The table below summarises who pays what. The dollar figures — rates, annual maximums and exemption amounts — are updated each year, so confirm the current numbers on the CRA website before you process payroll.

Each employee's withholding depends on the personal tax credits they claim on their TD1 form and, where applicable, a provincial or territorial TD1.

The Employer's Share Costs More Than You Withhold

New employers are often surprised that payroll costs more than gross wages plus what is withheld. On top of the employee's CPP and EI, you pay your own CPP contribution and your own EI premium, which is calculated at a higher rate than the employee's premium. Depending on the province or territory, you may also owe workers' compensation premiums and, in some jurisdictions, an employer health or payroll levy. Budget for these before you hire, and confirm current rates and thresholds with the CRA and your provincial or territorial workers' compensation board. See How to Hire Employees in Canada for the broader onboarding checklist.

How Payroll Remittance Works

To remit, you need a Business Number (BN) with a payroll (RP) program account. Once you are registered, the CRA assigns a remittance frequency — generally monthly for new and smaller employers, with faster schedules for larger remitters, and quarterly remitting available to some small employers that meet the threshold. Your frequency and due dates appear in CRA My Business Account and on your remittance form, so check them rather than assuming.

A typical cycle looks like this:

1. Collect a federal TD1, and a provincial or territorial TD1 where applicable, from each new employee.
2. Calculate gross pay, then withhold CPP, EI and income tax using CRA payroll formulas or approved payroll software.
3. Add the employer's CPP and EI share on top of the withheld amounts.
4. Remit the total by your assigned due date — remittances generally fall due shortly after the pay period, so confirm the exact date in My Business Account.
5. File the annual T4 slips and summary, and issue a Record of Employment when an employee's earnings are interrupted.

Registering and Reporting

You can register for a payroll account online through the CRA once you have a BN. From there, reporting means remitting with each pay period using your remittance form or online banking, then filing T4 slips and the T4 Summary after the end of the calendar year. Deadlines for T4 filing and for issuing Records of Employment are set by the CRA; confirm the current dates on canada.ca, because late filing attracts penalties.

Fees paid to contractors are treated differently from wages. If you pay a contractor, withholding is generally not required, but a T4A slip may be needed. The distinction matters: Independent Contractor vs Employee in Canada and T4A vs T4 explain where the line falls.

If You Have No Employees

A sole proprietor with no employees does not run payroll and does not withhold source deductions. Money you take out of the business is a draw, not a wage, and the business income is reported on your personal return using form T2125. If you later incorporate or hire staff, payroll obligations begin at that point. Self-employed CPP contributions are handled through your personal return rather than through withholding.

Recordkeeping and Common Mistakes

Payroll produces a paper trail that the CRA can review for several years. Keep it tidy, and watch for these recurring errors:

• Missing a remittance due date, which triggers penalties and interest.
• Using last year's rates, maximums or formulas instead of the current year's tables.
• Withholding from the employee but forgetting to add the employer's CPP and EI share.
• Treating a worker as a contractor when the working relationship looks like employment.
• Failing to keep TD1 forms, pay records, remittance confirmations and slips together.

Good payroll records sit inside your general bookkeeping system, so it helps to set up clean categories from the first pay run — see Bookkeeping for Sole Proprietors in Canada and Business Records Retention in Canada for how long to keep what.