Calculating Payroll Deductions

By Randall Orser | Personal Income Tax

pie chartAfter you have determined that you are an employer, a trustee or a payer and have opened a payroll program account, you have to calculate the CPP contributions, EI premiums, and income tax deductions based on the amounts you pay your employees. You also have to calculate your share. You should hold these amounts in trust for the Receiver General in a separate account from your operating business account.

Canada Pension Plan (CPP)

You have to deduct CPP contributions from an employee’s pensionable earnings if that employee:

  • is in pensionable employment during the year; and
  • is not considered to be disabled under the CPP or the Quebec Pension Plan (QPP); and
  • is 18 to 70 years old even if the employee is receiving a CPP or QPP retirement pension. Exception: do not deduct CPP if the employee is 65 to 70 years old, and gives you Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election with parts A, B and C completed.
    • Ensure that Canada Revenue Agency (CRA) has received the CPT30 before not deducting CPP

Employment Insurance (EI)

You have to deduct employment insurance (EI) premiums from your employee’s insurable earnings up to the yearly maximum. As an employer, you must contribute 1.4 times the amount of EI premiums that you deduct from your employee’s remuneration.

Insurable employment includes most employment in Canada under a contract of service (employer-employee relationship).

There is no age limit for deducting EI premiums.

Some employers provide a wage-loss replacement plan for short-term disability to their employees. If the plan meets certain standards established by the Employment Insurance Regulations, the employer’s EI premiums could be paid at a reduced rate (less than 1.4 times the employee’s premiums).

Income Tax

As an employer or payer, you are responsible for deducting income tax from the remuneration or other income you pay. There is no age limit for deducting income tax and there is no employer contribution required.

Which provincial or territorial tax tables should you use?

Employment income

When you pay employment income such as salaries, wages, or commissions, you have to determine your employee’s province or territory of employment so you can withhold the proper deductions. This depends on whether your employee physically reports for work at your establishment or “place of business”.

For income tax, CPP and EI withholding purposes, an “establishment of the employer” is any place or premises in Canada that is owned, leased or rented by you and where one or more employees report to work or from which one or more employees are paid.

This does not have to be a permanent physical location. For example, the place of business for a construction company can be one or more construction sites or the place of business for a carnival can include a shopping mall parking lot. In these examples, the employee’s province or territory of employment would be the one in which the field office or shopping mall is located.

Employee reports to your establishment

If your employee reports to your establishment in person, the employee’s province or territory of employment is the one in which it is located. There is no minimum amount of time the employee has to report to that place.

Example 1

Your head office is in Ontario, but you require your employee to report to your place of business in Manitoba. In this case, use the Manitoba Payroll Deductions Tables.

Example 2

Your employee lives in Quebec, but you require your employee to report to your place of business in New Brunswick. In this case, use the New Brunswick Payroll Deductions Tables.

Example 3

Your employee works from a home office in Alberta, but occasionally has to report to your Alberta office. You pay your employee from your head office in Ontario. Use the Alberta Payroll Deductions Tables since the employee sometimes reports to your Alberta office.

Employee does not report to your establishment

If your employee does not have to report to your establishment in person (for example, the employment contract says the employee works from a home office), the employee’s province or territory of employment is the one from where your employee’s salary and wages are paid. This will normally be the location of your payroll department or payroll records.

Example 4

Your employee does not have to report to any of your places of business, but you pay the employee from your office in Quebec. In this case, use the Quebec Payroll Deductions Tables. The employee does not have to pay CPP contributions, but may have to pay Quebec Pension Plan (QPP) contributions.

No establishment in Canada

If your employees working in Canada but you do not have a place of business or an employer’s establishment in Canada, use the Payroll Deductions Tables for In Canada beyond the limits of any province/territory or outside Canada when deducting income tax at source.

Example 5

Your Canadian resident employees work as salespeople in Ontario and British Columbia. They work from their home offices and report directly to your business located outside Canada. In this case, use the Payroll Deductions Tables for In Canada beyond the limits of any province/territory or outside Canada.

Methods of calculating deductions – CPP, EI, and income tax

You can use CRA’s Payroll Deductions Online Calculator (PDOC) to calculate payroll deductions for all provinces and territories except Quebec. It calculates payroll deductions for the most common pay periods (such as weekly or biweekly), based on exact salary figures.

The payroll deductions tables help you calculate the Canada Pension Plan (CPP) contributions, employment insurance (EI) premiums, and the amount of federal, provincial (except Quebec), and territorial income tax that you have to deduct from amounts you pay each pay period.

A pay period means the period for which you pay earnings or other remuneration to an employee. Check with your Province’s employment standards to see how often you are required to pay employees. British Columbia requires employees to be paid at least twice per month, and within eight days of the payroll cutoff date.

The best is to use either software, such as Sage 50 or QuickBooks, or hire a payroll service when the number of employees becomes too great to look after yourself. Remember that you are entirely responsible for any errors that occur in calculating deductions, whether you use software or not. However, if you do use PDOC and errors are made because of that, CRA generally doesn’t penalize you, as it was their online software that caused the errors.

Payroll can get quite complicated depending on how your employees are paid, what benefits or allowances they receive, and how many employees you have. It’s always best to bring in a professional when you have employees, and let them help you take care of this burden.

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