The Canadian Parliament and Provincial Legislatures establish federal and provincial tax-withholding rates. Procedures for determining your withholding amounts vary by tax. Sometimes withholding amounts depend on the type of wages being deducted.
Your TD1 form helps your employer to determine the amount of federal income tax to subtract from your wages. For this reason, your employer must give you the form to complete when you're hired. Your withholding amount depends on the number of credits and filing status you claim on the form. Each credit gives you a sum that reduces your wages subject to taxation. The more allowances you claim, the less tax you pay; the fewer allowances you claim, the more tax you pay.
Note there are a Federal and a Provincial TD1, and you, the employee, must fill out both.
Federal income tax withholding is also based on your taxable wages. The more you earn, the more tax you pay; the less you earn, the less tax you pay. To arrive at your taxable wages, determine your gross pay, which is your entire pay before deductions. Then subtract nontaxable wages, such as qualified business expense reimbursements, and pretax deductions, such as qualified health insurance, from your gross pay.
CRA Guide T4032 Payroll Deductions Tables
Once taxable wages have been determined, withholding depends on CRA Guide T4032 Payroll Deductions Tables. Apply the withholding table that goes with your filing status, taxable wages, pay period and number of allowances. The table gives the exact amount that should come out of your paychecks. The CRA updates its tax tables periodically, typically semi-annually, so use the tax rate that applies to the tax year in question.
Flat Percentage Rates
Canada Pension Plan (CPP) and Employment Insurance (EI) are federal payroll taxes that are withheld at flat percentages of your wages. These rates are subject to change, usually annually. For 2018, Canada Pension Plan tax is withheld at 4.95 percent of your taxable wages, up to the annual wage maximum of $55,900. Employment Insurance is withheld at 1.66 percent of taxable wages to a maximum of $51,700.
Supplemental wages are payments you receive from your employer that are not regular wages. They may include overtime pay, bonuses, commissions, severance pay, sick pay, awards, prizes and retroactive pay increases. For federal income tax purposes, if supplemental wages are paid in addition to regular wages, they’re taxed as though the total were a single payment for the regular payroll. If supplemental wages are paid separately from regular wages, federal income tax may be subtracted at a flat 25 percent. If supplemental wages exceed $1 million for the calendar year, the excess amount is taxed at 35 percent.
Every province has an income tax rate and the amounts differ from Province to Province. If you are using CRA’s tax tables then both the federal and provincial amounts will show and are added together. Some Provinces do have additional taxes, such as Ontario’s health tax. Quebec has different rates for CPP and EI.