Payroll Deductions Canada: CPP, EI, Tax

Canadian payroll deductions trip up more small businesses than any other single compliance area. The rules are not especially complicated, but there are enough moving parts (CPP, EI, federal tax, provincial tax, the second CPP tier, provincial health premiums, EHT in some provinces) that a small miscalculation compounds quickly and shows up as a CRA notice months later. This guide explains what you owe, when you remit, and how to avoid the penalties that catch businesses off guard.

What source deductions actually are

Source deductions are the amounts a Canadian employer withholds from each employee's gross pay before the employee sees the net deposit. The employer then remits those withheld amounts to the Canada Revenue Agency on behalf of the employee. There are three main components.

Federal and provincial income tax. The largest share of most paycheques. The amount withheld depends on the employee's TD1 form, their total expected income, and any additional withholding they have requested.

Canada Pension Plan (CPP) contributions. Both the employee and the employer contribute. The employee side is withheld from pay; the employer side is paid by the business on top of payroll. Since 2024, CPP has two tiers, with additional contributions above the first earnings ceiling.

Employment Insurance (EI) premiums. Both sides also contribute, at different rates. Employee premiums are withheld; employer premiums are 1.4 times the employee rate and paid on top of payroll.

In addition to these three, some provinces apply additional employer-side levies that are sometimes lumped into the payroll-deductions conversation. The Ontario Employer Health Tax, the BC Employer Health Tax, and the Manitoba Health and Post-Secondary Education Tax Levy all apply to employers above specific remuneration thresholds. These are not technically source deductions, but they remit alongside and the practical workflow treats them together.

How CPP contributions are calculated

CPP contributions are withheld as a percentage of pensionable earnings above the basic exemption and below the year's maximum pensionable earnings ceiling. For 2026, the base CPP contribution rate is 5.95 percent on the employee side and 5.95 percent on the employer side, each. The basic exemption is subtracted from earnings before the rate is applied.

Since 2024, there is a second tier of CPP for earnings above the first ceiling and up to the second ceiling. The second-tier rate is 4 percent on both the employee and employer sides. Most Canadian SMB employees do not reach the second ceiling, but employees with comp above roughly 73,000 dollars annually will cross it, and payroll has to handle the transition automatically when they do.

The most common CPP error in payroll is failing to stop withholding when an employee reaches the yearly maximum. If your payroll system does not automatically cap contributions at the statutory ceiling, the employee will be over-contributed and will have to claim the overpayment on their personal tax return. It is correctable, but it is an annoying conversation you never want to have.

How EI premiums are calculated

EI premiums are simpler than CPP. The employee pays a flat percentage on every dollar of insurable earnings up to the annual maximum insurable earnings ceiling. The employer pays 1.4 times the employee rate on the same earnings. For 2026, the employee rate is 1.63 percent, so the employer rate is 2.28 percent. Quebec employees and employers pay at reduced rates because Quebec runs a parallel provincial program, the Quebec Parental Insurance Plan (QPIP), which adds its own premiums.

The most common EI error is misclassifying non-arms-length employees (family members working in the business) for EI purposes. CRA has specific rules for whether a spouse, a child, or a parent of the business owner is in insurable employment. Getting this wrong results in either paying EI when you should not have (recoverable on amendment) or not paying EI when you should have (back-assessment plus penalty).

Income tax withholding basics

Income tax withholding depends on four inputs: the employee's TD1 Federal form, their TD1 Provincial form, the frequency of the pay cycle, and the gross pay for that cycle. CRA publishes the formulas in the T4127 Payroll Deductions Formulas guide, which is updated twice a year. Most payroll software implements the formulas; the rare manual calculator works through the T4127 tables.

The most common income tax error is not updating TD1 forms when an employee's personal situation changes. A TD1 filled out at hire four years ago may no longer reflect the employee's correct federal or provincial claim amounts. The business has no legal obligation to chase TD1 updates, but the employee will owe at year-end and the awkward conversation will land on you anyway.

Remittance schedules by employer type

CRA assigns every employer a remitter type based on average monthly withholding. There are four main tiers.

Regular remitter. Most new and small employers. Remittance is due by the 15th of the month following the month in which the deductions were withheld. For example, November deductions are due December 15.

Quarterly remitter. Some small employers qualify for quarterly remittance. Deductions for a quarter are due by the 15th of the month following the quarter end.

Accelerated remitter, threshold 1. Average monthly withholding between 25,000 and 99,999 dollars. Remittance is due twice per month: by the 25th of the month for deductions from the first through fifteenth, and by the 10th of the following month for deductions from the sixteenth through month-end.

Accelerated remitter, threshold 2. Average monthly withholding of 100,000 dollars or more. Remittance is due four times per month, with specific calendar dates.

CRA reviews your remitter type annually based on your prior year's withholding. You can request a change if your business size has shifted. Most SMBs remit quarterly or as a regular remitter; accelerated remittance kicks in at significant payroll scale.

Common mistakes that trigger CRA penalties

Six mistakes show up in CRA letters more than any others.

Late remittance. The single most common cause of CRA payroll penalties. Late by one to three days is 3 percent; late by more than seven days is 10 percent. Multiple late remittances in a year compound. See our CRA payroll audit guide for how this plays out in a full audit scenario.

Under-remitted amounts. Calculating source deductions correctly but sending less than you calculated. This usually happens when a business misses a pay period or conflates net pay with remittance.

Missing the second CPP tier. As comp creeps above the first CPP ceiling, the second-tier calculation has to kick in. Generic payroll setups sometimes miss this.

Incorrect TD1 application. Applying the federal basic claim amount but missing a higher provincial claim for an Ontario employee who elected the higher amount, for example.

Family-member EI misclassification. Discussed above. Worth its own line because it generates a disproportionate share of reassessment letters.

Taxable benefit omissions. Employer-provided benefits such as personal use of a company vehicle, parking, cell phone allowances, and some gym memberships are taxable and must be included in pensionable and insurable earnings where applicable. Missing these is common and compounds over time.

How a payroll partner eliminates deduction errors

When a Canadian payroll partner administers your payroll, source-deduction calculation and remittance happen as part of the pay-cycle automation. CPP second-tier transitions happen automatically when an employee crosses the threshold. EI premium caps apply at the right moment. Income tax formulas stay current with each mid-year T4127 update. Remittance hits CRA on schedule without anyone in your office having to remember.

The direct error reduction is the biggest operational win, but the risk reduction is the biggest financial win. Late remittance penalties alone can reach 10 percent of the remittance amount, plus interest, plus reputational cost. Eliminating that single failure mode pays for a large share of the partner fee in most businesses.

What to do next

If your Canadian business has 10 or more employees and you are handling source deductions yourself, the question to ask is not whether you are doing it correctly today. The question is whether the ongoing error risk, the compounding time cost, and the late-remittance penalty exposure are worth the fee you would pay for a specialised partner to handle it.

For the broader context on what a Canadian payroll partner does, read our PEO Canada cornerstone guide. To request a free assessment, use our contact page. Zero obligation either way.