Payroll deductions in Canada: CPP, EI, and income tax explained for employers

Published Friday 2 October 2026

Table of contents

• What are payroll deductions in Canada?
• What are the mandatory payroll deductions?
• How much does the employer contribute?
• How do you calculate payroll deductions?
• When and how do you remit deductions to the CRA?
• What payroll records do you need to keep?
• Simplify payroll deductions with Xero
• FAQs on Canadian payroll deductions

Key takeaways

• Every Canadian employer withholds three mandatory payroll deductions from staff pay: Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and federal and provincial income tax.
• You also pay your own employer share on top of what you withhold, matching CPP dollar for dollar and paying 1.4 times the employee EI rate.
• The Canada Revenue Agency (CRA) sets the 2026 rates and ceilings, and its free online calculator works out the exact amounts for each pay run.
• You remit the deductions plus your employer share on a set schedule and keep your payroll records for at least six years.

What are payroll deductions in Canada?

Payroll deductions in Canada are the amounts you withhold from your employees' pay and send to the Canada Revenue Agency (CRA), along with your own required employer contributions. Together they fund the country's core benefit programs and cover each worker's tax bill.

You apply these deductions to salary, wages, bonuses, commissions, and most taxable benefits. As the employer, you're responsible for calculating the right amount, holding it in trust, and paying it to the CRA on time.

The money you withhold isn't yours to keep. You're collecting it on behalf of the government and your employee, so it stays separate from your operating cash until you remit it.

There are three mandatory payroll deductions, and each one has a clear set of rules you can follow. Once your process is set up, running the numbers each pay period becomes routine.

What are the mandatory payroll deductions?

The three mandatory payroll deductions are CPP contributions, EI premiums, and income tax. You withhold all three from your employees, and you add an employer share to CPP and EI.

Canada Pension Plan (CPP) contributions

CPP contributions fund retirement, disability, and survivor benefits, and both you and your employee pay into the plan. For 2026, the CRA sets the contribution rate at 5.95% each on pensionable earnings between the $3,500 basic exemption and the year's maximum pensionable earnings (YMPE) of $74,600.

That caps the maximum employee contribution and the maximum employer contribution at $4,230.45 each for the year. A second contribution, called CPP2, applies at 4% each on earnings between $74,600 and the second ceiling of $85,000, up to a maximum CPP2 contribution of $416 each.

Employment Insurance (EI) premiums

EI premiums fund temporary income support for workers who lose their jobs or take certain types of leave. For 2026, the employee premium rate is 1.63% of insurable earnings up to the maximum insurable earnings (MIE) of $68,900, which sets the maximum employee premium at $1,123.07.

You pay a higher employer rate of 2.28%, or 1.4 times the employee rate. That brings your maximum employer premium to $1,572.30 per employee for the year.

Federal and provincial income tax

Income tax is withheld from each employee's pay based on the federal and provincial forms they complete and the province or territory where they work. Your employees fill out federal and provincial TD1 forms so you can apply the right tax credits.

To find the exact amount to withhold, you use the CRA payroll deductions tables or its online calculator. The CRA sets out the full method on its guide to calculating payroll deductions and contributions.

How much does the employer contribute?

On top of what you withhold, you contribute your own employer share for CPP and EI, but not for income tax. You match CPP dollar for dollar and pay 1.4 times the employee EI rate, while income tax is withheld from the employee only.

Your costs per employee for 2026 break down clearly:

• Match CPP at 5.95% plus CPP2 at 4%, up to $4,230.45 and $416, respectively, per employee.
• Pay EI at 2.28%, or 1.4 times the employee rate, up to $1,572.30 per employee.
• Withhold income tax from the employee's pay, with no employer match to add.

These employer contributions are a real cost of employing staff, separate from the wages you pay. For a fully paid-up employee in 2026, your CPP and EI share alone can add several thousand dollars a year to each salary.

Planning for these contributions helps you protect your cash flow position as your team grows. Each new hire adds a predictable payroll cost you can budget for in advance.

How do you calculate payroll deductions?

You calculate payroll deductions by working out CPP, EI, and income tax for each employee's pay for the period, then adding your employer share. The CRA Payroll Deductions Online Calculator does the math for you, and payroll software can run it automatically each cycle.

If you'd rather understand the steps yourself, here's how a single pay run comes together.

1. Gather each employee's TD1 forms and pay details

Collect the completed federal and provincial TD1 forms for every employee, plus their gross pay for the period. These forms tell you which tax credits apply.

2. Apply the CPP basic exemption and calculate CPP and CPP2

Subtract the pay-period portion of the $3,500 basic exemption from pensionable earnings, then apply the 5.95% CPP rate. Add CPP2 at 4% on any earnings above the $74,600 ceiling.

3. Calculate EI premiums

Apply the 1.63% employee rate to insurable earnings up to the $68,900 maximum. Then work out your employer premium at 2.28%.

4. Determine income tax

Use the CRA T4032 payroll deductions tables or the online calculator to find the federal and provincial tax to withhold. Base it on the employee's TD1 credits and province of employment.

5. Total and record the deductions

Add up the employee deductions you withheld and your employer contributions. Record the amounts against each employee so your remittance and reporting stay accurate.

When and how do you remit deductions to the CRA?

You remit the deductions you withheld plus your employer share to the CRA on the schedule the agency assigns you. New and small employers are usually monthly remitters, with payment due by the 15th of the month after you pay your staff.

Before your first pay run, you open a payroll (RP) account with the CRA, which links your remittances to your business. You can then remit online through My Business Account or your financial institution.

Your assigned remitter frequency depends on your average monthly withholding, so it can change as you grow. The CRA tells you which schedule to follow, and it can move you to a more frequent one as your payroll rises.

Paying on time keeps you onside, because the CRA charges penalties on late or missed remittances. Setting a reminder for the 15th or letting online payroll software flag the date keeps every remittance on track.

What payroll records do you need to keep?

You need to keep your payroll records for at least six years from the end of the tax year they relate to. These records support the amounts you withheld and remitted if the CRA ever reviews your account.

Keep a complete set of records for every employee and pay period:

• hours worked and gross pay for each employee
• CPP, EI, and income tax amounts you deducted
• completed federal and provincial TD1 forms
• remittance records and payment confirmations
• any taxable benefits you included in pay

Organized records also make year-end reporting far quicker. You can read the full retention rules on the CRA keeping records page.

Simplify payroll deductions with Xero

Payroll deductions are manageable once you have a clear process, and the right software takes the manual work off your plate. Online accounting software can help you calculate CPP, EI, and income tax for each pay run, track what you owe the CRA, and keep your records in one place.

That frees you to focus on running your business instead of double-checking rates and deadlines by hand. You can also connect your pay runs to your other money tasks, from tracking spending to sending invoices with automated tools.

Get one month free

FAQs on Canadian payroll deductions

These answers cover the payroll deduction questions employers ask most often once they start running payroll.

Are payroll deductions the same in every province?

Across most of Canada you deduct CPP and EI at the federal rates, while income tax withholding changes by province or territory of employment. Quebec is the exception: It uses the Quebec Pension Plan (QPP) instead of CPP and a lower EI rate paired with its own parental insurance plan, so its rates differ.

Do you deduct CPP and EI from bonuses and vacation pay?

Yes, bonuses and vacation pay are pensionable and insurable, so you withhold CPP and EI on them. You also withhold income tax, using the CRA's bonus method for one-time payments.

What happens if you remit payroll deductions late?

The CRA applies a penalty based on how late the payment is and how often it happens. Remitting on time each period keeps you clear of these charges.

Do you pay CPP and EI on every employee?

You withhold CPP and EI from most employees and pay your employer share on each one. A few situations, such as workers below the CPP age threshold, follow different rules the CRA sets out.