As we’re coming to the end of the year, it’s a good time to check if you’re correctly calculating and deducting for Canada Pension Plan and Employment Insurance. You may think the software, or even Canada Revenue Agency’s Payroll Deductions Online Calculator (PDOC) are doing the correct job, however, that’s not always the case. In most cases, there’s not much of a different, but in some cases, it can be substantial.
Pensionable and insurable earnings review (PIER)
Each year, CRA checks the calculations you made on the T4 slips that you filed with your T4 Summary. CRA does this to make sure the pensionable and insurable earnings you reported agree with the deductions you withheld and remitted.This should be something you’re doing before you do your final remittance for the year in January of the following year. If you have someone preparing your T4s using software, they can do this for you before you file your December remittance in January. The software checks the CPP & EI and then adjusts the amounts and puts them to TAX. The reason to do this before the final remittance before the year is so you don’t end up with a credit balance on your payroll deductions account (this tends to trigger CRA into asking questions).
If you’re doing the T4s yourself then there is a way of checking the CPP & EI amounts.
Checking the amount of CPP you deducted
Step 1 – Prorate the maximum CPP contribution for the year by following these steps:
Stage 1: Deduct the year's basic exemption ($3,500 for 2016) from the year's maximum pensionable earnings ($54,900 for 2016).
Stage 2: Multiply the result of Stage 1 by the number of pensionable months.
Stage 3: Divide the result of Stage 2 by 12 (months).
Stage 4: Multiply the result of Stage 3 by the CPP rate that applies for the year (4.95% for 2016).
To find out about the previous and current exemptions, maximums, and rates, see the CPP contribution rates, maximums and exemptions chart.
Step 2 – Calculate the CPP contribution per pay period using the Manual calculation for CPP, and withhold the amount calculated until one of the following happens:
* the maximum prorated contribution for the year is reached; or
* the last pay period for which deductions are required is completed.
Step 3 – The correct amount of CPP contributions will be the result of Step 1 or Step 2, whichever is the lowest.
Brent turns 18 on June 15, 2016. He receives $1,000 every two weeks ($26,000 a year). This amount is less than the maximum pensionable earnings ($54,900 for 2016) that require CPP contributions.
Prorated maximum contribution for 2016:
($54,900 – 3,500) × 6/12 × 4.95% = $1,272.15
(6/12 represents the number of pensionable months divided by 12).
Brent’s maximum CPP contribution for 2016 is $1,272.15.
Pay period calculation:
January to June 2016
No CPP contributions
July to December 2016
* Pay period: biweekly* Earnings: $1,000
* Brent’s first pay in July is July 3, for the period June 20 to July 3.
Using the calculation in the basic exemption chart, Brent’s CPP contributions for each pay are calculated as follows:
Step 1: Brent’s pensionable earnings = $1,000.00
Step 2: Basic exemption for the period from the basic exemption chart = $134.61
Step 3: Pensionable earnings minus basic exemption = $865.39
Step 4: CPP contribution rate for 2016 = 4.95%
Step 5: CPP contribution per pay period = $42.84
You will have to start deducting $42.84 from each of Brent’s pays, beginning with the one dated July 3 (the month after Brent turns 18). His actual contributions for the year will be $42.84 × 13 (biweekly pay periods) = $556.92.
This does not exceed the prorated maximum contribution of $1,272.15; therefore, the correct amount of CPP has been deducted.
When you fill out Brent’s T4 slip at the end of the year, report $26,000 in box 14, $556.92 in box 16, and $13,000 in box 26. Fill in the rest of his T4 slip in the usual way.
Checking the Amount of EI You Deducted
Checking EI is much easier than CPP as there is no yearly exemptions, though there is a yearly maximum income amount (2017 = $51,300 and $836.19 in total EI). Basically, you take the employee’s income for the year times it by the current EI rate (1.63% to maximum of $836.19) and that’s what should’ve been deducted from the employee.
Bob earned $47,000 in the year, so his total EI contributions should be $766.10. If that matches what you have in your records then you’re good to go, if it’s under you’ll have to take more off of Bob’s next cheque. If it’s more, then just adjust his EI to match that amount and add the difference to his TAX amount. If it’s just a couple of pennies, don’t worry about it.
The annual maximum insurable earnings ($51,300 for 2017) apply to each job the employee holds with different employers (different business numbers). If an employee leaves one employer during the year to start work with another employer, the new employer also has to deduct EI premiums without taking into account what the previous employer paid. This is the case even if the employee has paid the maximum premium amount during the previous employment.