New Brunswick

Nova Scotia

Prince Edward Island

Yukon

Changes in the guide

• Clarification for rounding ratios has been provided in Chapter 1 – General information.
• The formulas have been consolidated for all the provinces in Chapter 4 – Step 5 – Formulas to calculate the annual provincial or territorial tax deduction (T2).
• Appendix 1 has been added to the guide with scenarios illustrating the Income Tax Regulation amendments.

Chapter 1 – General information

Rounding procedures

For all mathematical calculations in this guide, use the following rounding rules except when we specify otherwise.

For income tax deductions

If the figure calculated for an employee’s income tax deduction for a certain pay period has three or more digits after the decimal point, increase the second digit after the decimal point by one if the third digit is five or more, and drop the third digit. If the third digit after the decimal point is less than five, drop the third digit.

For Canada Pension Plan (CPP) basic exemption and contributions

Determine an employee’s basic exemption for a pay period by dividing the annual basic exemption by the number of pay periods in the calendar year. If the figure has three or more digits after the decimal point, drop the third digit after the decimal point.

When the employee’s contribution to CPP for the pay period has three or more digits after the decimal point, increase the second digit after the decimal point by one if the third digit is five or more, and drop the third digit. If the third digit after the decimal point is less than five, drop the third digit.

Rate ratios in the formulas are part of the calculation and should not be rounded.

For Employment Insurance (EI) premiums

When the employee’s or employer’s EI premium for the pay period has three or more digits after the decimal point, increase the second digit by one if the third digit is five or more, and drop the third digit. If the third digit after the decimal point is less than five, drop the third digit.

Tax deductions comparison

When the tax deductions amount using Option 1 in this guide is compared to the tax deductions amount in the publication T4032, Payroll Deductions Tables, the amounts will not necessarily be the same. Any difference results from the fact that the amounts in the T4032 are based on:

(i) the mid-point of the range of remuneration under the “Pay” column;
(ii) the federal tax credit for Canada Pension Plan or Quebec Pension Plan contributions and employment insurance premium deductions is based on the amount determined in item (i);
(iii) the mid-point of the “Claim code” amounts on federal, provincial, and territorial TD1 forms is used, except for code 1 where the actual basic personal non-refundable tax credit amount is used. For claim code 0, no personal tax credits amounts are used when calculating the tax deduction amounts.

Chapter 2 – Personal tax credits returns (Form TD1)

To determine federal Total Claim (TC), use the total claim amount on Form TD1. Employers are to update TC at the beginning of each year by using either indexing or claim codes.

To determine provincial or territorial total claim (TCP), use the total claim amount on the appropriate provincial or territorial Form TD1. Employers are to update TCP at the beginning of each year using either indexing or claim codes.

Since claim codes use a mid-point in a range, indexing is considered more accurate.

A separate worksheet, TD1-WS, is available for employees or pensioners who want to calculate partial claims for some of the federal personal tax credits amounts. Provincial worksheets are available to calculate partial claims for some of the provincial personal tax credits amounts.

Option 1 – Indexing of personal amounts

Each year, certain personal tax credit amounts are indexed based on changes to the Consumer Price Index(CPI). Since only some of the amounts are indexed, we recommend that you record separately in your payroll records each item shown on the employee’s or pensioner’s TD1 form. This will allow you to automatically increase the applicable indexed claim amounts when necessary. This also means you will not have to ask your employees or pensioners to file a new TD1 form when indexing applies.

You can use the following method to calculate the value of TC or TCP (personal tax credits amount) when indexing applies:

Note:

The Federal and Yukon Claim Code chart income range is $2,583 between all claim codes once the BPAF or BPAYT has been calculated. For example, if the Federal BPAF is $13,521 for a particular employee, then claim code 2 range would be $13,521 – $16,104 and so forth up to claim code 10. Based on the example above, to calculate the non-refundable tax credits for the BPAF of $13,521, find the mid-point between $13,521 and $16,104, this amount will be the total claim (Factor TC) for your calculation, multiply this TC by lowest federal tax rate.

The Nova Scotia Claim Code chart income range is $1,600 between all claim codes, once the BPANS has been calculated. For example, if BPANS is $11,481 for a particular employee, then the claim code 2 range would be $11,481 – $13,081 and so forth up to claim code 10. Based on above example, to calculate the non-refundable tax credits for the BPANS of $11,481, find the mid-point between $11,481 and $13,081, this amount will be the total claim (Factor TCP) for your calculation, multiply this TCP by lowest provincial tax rate.

PDOC will accept direct entry of TC and TCP. To verify your calculations using PDOC simply input the amount for TC and TCP obtained from the appropriate claim code table.

If federal Form TD1 is not submitted by the employer or pensioner, TC is calculated using the BPAF formula. If the appropriate provincial or territorial Form TD1 is not submitted by the employee or pensioner, TCP is the province or territory's Basic Personal Amount. For Nova Scotia and Yukon, use BPANS and BPAYT formulas respectively.

Federal Basic Personal Amount (BPAF) Formula

Nova Scotia Basic Personal Amount (BPANS) Formula

Yukon Basic Personal Amount (BPAYT) Formula

Chapter 3 – Glossary

Table 3.1 Glossary

Note:

Step 1 – Formula to calculate annual taxable income (A)

A = Annual taxable income
= [P × (I – F – F2 – F5A – U1 )] – HD – F1
If the result is negative, T = L.

Only for employees paid by commission:

A = I1 – F* – F2* – F5A – U1* – HD – F1 – E
If the result is negative, T = L.
* Estimated deduction amounts for the year. For registered retirement savings plan (RRSP) contributions included in F, you will need to find out from your employee paid by commission the estimated or expected annual deduction. We recommend that you caution employees not to exceed their RRSP contribution limit for the year.

P = The number of pay periods in the year:

Note:

K3 = If the K3 amount is implemented after the first pay period in the year, K3 must be adjusted using the following formula:
(P × K3) / PR

K4 = The lesser of:
(i) 0.15 × A*;
(ii) 0.15 × CEA
CEA is an indexed amount. See Table 8.2 Other rates and amounts.

* For the Canada employment amount, A is the annual gross income from office or employment before deductions. Only include the amounts from office or employment, this is the same amount you normally report in box 14 of the T4 slip(s).

Step 3 – Formula to calculate the annual federal tax payable (T1)

T1 = Annual federal tax deduction, except for employees in Quebec, outside Canada, and in Canada beyond the limits
of any province or territory

= T3 – (P × LCF)*
* If the result is negative, enter $0.

Only for employees in Quebec:
T1 = [(T3 – (P × LCF))* – (0.165 × T3)]*
* If the result is negative, enter $0.

Only for employees outside Canada and in Canada beyond the limits of any province or territory:
T1 = [T3 + (0.48 × T3) – (P × LCF)]*
* If result is negative, enter $0.

LCF = The lesser of:
(i) $750;
(ii) 15% of the amount deducted or withheld for the pay period for the acquisition, by the employee, of approved
shares of the capital stock of a prescribed labour-sponsored venture capital corporation

Note:

Tax calculation formulas for bonuses, retroactive pay increases, and other non-periodic payments

Introduction

Generally, the tax on a bonus (or retroactive pay increase) is calculated by finding the tax on the total of regular annual income plus any previous bonuses plus the current bonus and subtracting the tax on the total of regular annual income plus any previous bonuses. The difference will be the tax on the current bonus. The F5A and F5B values are expected to be the same for the calculation of Annual Taxable income (A). This is applicable for the regular payment, Step 1 and for Step 2.

In the optional year-to-date method outlined below, instead of annualizing the current income, use year-to-date income values and year-to-date deductions as the annual income with and without the bonus. In either case the tax on the bonus is as follows:

TB = The difference between:
(i) the annual tax amount (T1 + T2) based on the instructions in Step 1 below;
(ii) the annual tax amount (T1 + T2) based on the instructions in Step 2 below

(1) Regular bonus calculation

Step 1

Determine the annual tax (T1 + T2) based on the annual taxable income (factor A) with the non-periodic payment payable now. The formula to calculate factor A is as follows:

A = ([P × (I – F – F2 – F5A – U1)] – HD – F1)* + (B – F3 – F5B)** + (B1 – F4 – F5B_YTD)**
* If the result is negative, enter $0.
** Result cannot be negative, and result cannot be negative after deducting CPP and EI.

Note:

Step 2

Determine the annual tax (T1 + T2) based on the annual taxable income (factor A) without the non-periodic payment payable now. The formula to calculate factor A is as follows:

A = ([P × (I – F – F2 – F5A – U1)] – HD – F1)* + (B1 – F4 – F5B_YTD)**
* If the result is negative, enter $0.
** Result cannot be negative, and result cannot be negative after deducting CPP and EI.

If I = 0, use the most recent I.

(2) Year-to-date bonus calculation (optional)

Step 1

Determine the annual tax (T1 + T2) based on the annual taxable income (factor A) with the non-periodic payment payable now. The annual taxable income (factor A) is based on a year-to-date concept, plus the estimated income for the rest of the pay periods in the year. YTD means year-to-date (before this pay period). The formula to calculate factor A is as follows:

A = [(I_YTD – F_YTD – F2_YTD – F5A_YTD – U1_YTD) + (PR × (I – F – F2 – F5A – U1)) – F1 – HD]* + (B – F3 – F5B)** + (B1 – F4 – F5B_YTD)**
* If the result is negative, enter $0.
** Result cannot be negative, and result cannot be negative after deducting CPP and EI.

Note:

Step 2

A = [(I_YTD – F_YTD – F2_YTD – F5A_YTD – U1_YTD) + (PR × (I – F – F2 – F5A – U1)) – F1 – HD]* + (B1 – F4 – F5B_YTD)**
* If the result is negative, enter $0.
** Result cannot be negative, and result cannot be negative after deducting CPP and EI.

If I = 0, use the most recent I.

Example for year-to-date bonus calculation method

In this example, an employee got a retroactive pay increase from $1,000 to $1,100 per week that applies to 25 weeks. Therefore, a retroactive pay increase payment of $2,500 is payable now. An amount of $1,000 will be directed to the employee’s RRSP. Thirty pay periods have passed and 22 pay periods remain in the year. Year-to-date income is $31,000 which includes a one-time $1,000 bonus that was previously paid, year-to-date RPP is $1,350, year-to-date CPP deductions for additional contributions are $289.91(F5A_YTD = $280.24; F5B_YTD = $9.67) and year-to-date union dues are $150. The current income is $1,100 with RPP withheld of $45 and union dues of $5. The employee received $9.67 of CPP deductions for additional contributions (F5B_YTD) on the $1,000 bonus payment that was previously received.

C = 0.0595 × ($3,600 – ($3,500/52))
= $210.20

F5 = C × (0.0100/0.0595)
= $210.20 × (0.0100/0.0595)
= $35.33

F5A = $35.33 × (($3,600 – $2,500)/$3,600)
= $10.80

F5B = $35.33 × ($2,500/$3,600)
= $24.53

Step 1

A = Annual taxable income with the non-periodic payment payable now
= [(I_YTD – F_YTD – F2_YTD – F5A_YTD – U1_YTD) + (PR × (I – F – F2 – F5A – U1)) – F1 – HD]* + (B – F3 – F5B)** + (B1 – F4 – F5B_YTD)**
= [($30,000 – $1,350 – $0 – $280.24 – $150) + (22 × ($1,100 – $45 – $0 – $10.80 – $5)) – $0 – $0] + ($2,500 – $1,000 – $24.53) + ($1,000 – $0 – $9.67)
= $28,219.76 + $22,862.40 + $1,475.47 + $990.33
= $53,547.96

Step 2

A = Annual taxable income without the non-periodic payment payable now
= [(I_YTD – F_YTD – F2_YTD – F5A_YTD – U1_YTD) + (PR × (I – F – F2 – F5A – U1)) – F1 – HD]* + (B1 – F4 – F5B_YTD)**
= [($30,000 – $1,350 – $0 – $280.24 – $150) + (22 × ($1,100 – $45 – $0 – $10.80 – $5)) – $0 – $0] + ($1,000 – $0 – $9.67)
= $28,219.76 + $22,862.40 + $990.33
= $52,072.49

After you have calculated the annual taxable income, factor A, in steps 1 and 2, calculate the factors T1 and T2 in the same way as the periodic payment.

Note:

Step 4 – Formula to calculate annual basic provincial or territorial tax (T4)

T4 = (V × A) – KP – K1P – K2P* – K3P – K4P
If the result is negative, T4 = $0.
* For employees that are transferred from Quebec to a location outside Quebec, replace K2P with K2RP.

Step 5 – Formulas to calculate the annual provincial or territorial tax deduction (T2)

T2 = T4 + V1 + V2 – S – (P × LCP)
If the result is negative, T2 = $0.

Only for employees in Quebec:
T2 = $0

Only for employees outside Canada and in Canada beyond the limits of any province or territory:
T2 = $0

Where:
T4 = (V × A) – KP – K1P – K2P – K3P – K4P

V and KP are based on 2023 values for A see the Rates (R, V), income thresholds (A), and constants (K, KP) for 2023 Table 8.1 in Chapter 8.

K1P = Lowest provincial tax rate × TCP

K2P = [(Lowest provincial tax rate × (P × C × (0.0495/0.0595), maximum $3,123.45 × (PM/12))) + (Lowest provincial tax rate × (P × EI, maximum $1,002.45))]

K2RP = [(Lowest provincial tax rate × (P × C × (0.0495/0.0595), maximum ($3,123.45 × (PM/12) – (DQ × (0.0495/0.0640)) +
(DQ × (0.0540/0.0640))))) + (Lowest provincial tax rate × (P × EI, maximum $1,002.45))]

Replace the lowest provincial or territorial tax rate with the appropriate rate for the province or territory that applies to the employee or pensioner.

Unless specified, the value for K4P, LCP, S, V1 and V2 = 0.

British Columbia

S = Where A ≤ $23,179, S is equal to the lesser of:
(i) T4;
(ii) S2

= Where $23,179 < A ≤ $37,814, S is equal to the lesser of:
(i) T4;
(ii) S2 – [(A – $23,179) × 3.56%]

= Where A > $37,814
= $0

Manitoba

LCP = The lesser of:
(i) $1,800;
(ii) 15% of the amount deducted or withheld for the pay period for the acquisition by the employee of approved shares of the capital stock of a prescribed labour-sponsored venture capital corporation

Note:

New Brunswick

LCP = The lesser of:
(i) $2,000;
(ii) 20% of the amount deducted or withheld for the pay period for the acquisition by the employee of approved shares of the capital stock of a prescribed labour-sponsored venture capital corporation

Note:

Nova Scotia

LCP = The lesser of:
(i) $2,000;
(ii) 20% of the amount deducted or withheld for the pay period for the acquisition by the employee of approved shares of the capital stock of a prescribed labour-sponsored venture capital corporation

Note:

Ontario

V1 = Where T4 ≤ $5,315
V1 = $0

Where $5,315 < T4 ≤ $6,802
V1 = 0.20 × (T4 – $5,315)

Where T4 > $6,802
V1 = 0.20 × (T4 – $5,315) + 0.36 × (T4 – $6,802)

V2 = Where A ≤$20,000, V2 = $0
Where $20,000 < A ≤ $36,000, V2 = the lesser of:
(i) $300;
(ii) 0.06 × (A – $20,000)

Where $36,000 < A ≤ $48,000, V2 = the lesser of:
(i) $450;
(ii) $300 + (0.06 × (A – $36,000))

Where $48,000 < A ≤ $72,000, V2 = the lesser of:
(i) $600;
(ii) $450 + (0.25 × (A – $48,000))

Where $72,000 < A ≤ $200,000, V2 = the lesser of:
(i) $750;
(ii) $600 + (0.25 × (A – $72,000))

Where A > $200,000, V2 = the lesser of:
(i) $900;
(ii) $750 + (0.25 × (A – $200,000))

Note:

S = The lesser of:
(i) T4 + V1;
(ii) [2 × (S2 + Y)] – [T4 + V1]

If the result is negative, S = $0.

Where:
Y = The total of the following amounts as shown on Form TD1ON or for which the employee or pensioner has made a written or electronic request:

• $506 multiplied by the number of disabled dependants;
• $506 multiplied by the number of dependants under age 19

Note:

Prince Edward Island

V1 = Where T4 ≤$12,500
V1 = $0
Where T4 > $12,500
V1 = 0.10 × (T4 – $12,500)

Quebec

In this publication, we refer to the annual provincial or territorial tax deduction as factor T2. However, factor T2 does not apply in the province of Quebec. Quebec administers its own provincial income tax and Quebec Pension Plan contributions. If you have questions about the formulas for Quebec, please contact Revenu Québec:

Revenu Québec
3800, rue de Marly
Quebec (Québec) G1X 4A5

Telephone: 1-800-567-4692
Outside Canada: 1-418-659-4692

Quebec employers whose employees receive income from tips and gratuities should review the section called “Calculating payroll deductions for employees in the hotel and restaurant business in Quebec,” in the publication T4032QC, Payroll Deductions Tables.

Saskatchewan

LCP = The lesser of:
(i) $875;
(ii) 17.5% of the amount deducted or withheld for the pay period for the acquisition by the employee of
approved shares of the capital stock of a prescribed labour-sponsored venture capital corporation

Note:

Yukon

K4P = The lesser of:
(i) 0.064 × A*;
(ii) 0.064 × CEA
CEA is an indexed amount. See Table 8.2 Other rates and amounts in Chapter 8.

* For the Canada employment amount, A is the annual gross income from office or employment before deductions. Only include the amounts from office or employment, this is the same amount you normally report in box 14 of the T4 slip(s).

Outside Canada and in Canada beyond the limits of any province or territory

V, V1, V2, S, and LCP = $0

Step 6 – Formulas to calculate the estimated federal and provincial or territorial tax deductions (T) for the pay period

T = [(T1 + T2) / P] + L
You can round the resulting amount to the nearest multiple of $0.05 or $0.01.

Only for employees in Quebec, outside Canada, and in Canada beyond the limits of any province or territory:
T = (T1 / P) + L
You can round the resulting amount to the nearest multiple of $0.05 or $0.01.

For employees paid by commission who have filled out Form TD1X:
T = The tax to be deducted on the current commission payment (factor G)
= [(T1 + T2) / (I1 / G)] + L
You can round the resulting amount to the nearest multiple of $0.05 or 0.01.

Chapter 5 – Option 2 – Tax formulas based on cumulative averaging

Option 2 formulas are intended for employees whose pay varies considerably from one pay period to the next. In the Option 2 formulas, the amount of tax to be deducted is based on the projected annual taxable income (including bonuses) compared to the amount of tax already deducted in the year. Option 2 works well for employees who are employed for a full calendar year. If the employee’s income is relatively stable for each pay period, there will not be much difference in the tax deductions with Option 2 compared to Option 1.

The following sections explain in detail how Option 2 works. The initials YTD used in this option means year-to-date and applies to payments or deductions for the current year, but not the payment payable now and the deductions for the current pay period.

Calculation of income

In Option 2, the actual year-to-date income plus the current income is projected over the rest of the pay periods in the year. For example, an employee received a total of $20,000 in 20 previous pay periods and $500 in the current pay period, and there are 5 pay periods left. The projected income for the year using Option 2 will be $25,380.95 [($20,000 + $500) × 26/21].

To determine year-to-date income, you have to use the year-to-date taxable income. Therefore, you will have to store and use the year-to-date values for each pay period factor, such as RPP (factor F) and union dues (U1).

Calculation of tax for the pay period

For Option 2, you calculate the tax on the projected income for the year, and then find the tax amount that is proportional to the number of pay periods that have occurred (including the current pay period). Compare the result to the tax deducted in the year-to-date. The difference is the tax payable on the current income.

Continuing the above example, if the total federal and provincial or territorial tax on $25,380.95 is $3,560.17, the proportional year-to-date tax is $2,875.52 ($3,560.17/26 × 21). If the total tax deducted year-to-date is $2,736.40 the tax on the current income of $500 is $139.12 ($2,875.52 – $2,736.40). The tax values used in this example are fictitious.

Special situations

When you change tax options to Option 2 during the year, we recommend that you reset the S1 factor to the first pay period. For example, if your pay period is weekly and the tax option is changed for the first pay period after July 1, then S1 should be reset to 52/1 instead of 52/27. In this way, the tax deductions that have been made under the previous option are not considered when calculating the deductions under the new option. This modification could also apply when an employee starts employment with you during the year.

When there are tax changes during the year, the first pay period after the change will show a significant adjustment to balance the new annual tax with the tax deducted at the old rates. We recommend that you reduce this impact by resetting the S1 factor or by averaging the tax increase or decrease over the rest of the pay periods.

Note:

Formula to calculate annual taxable income (A)

A = Projected annual taxable income
= [S1 × (I – F – F2 – F5A – U1)] + (B1 – F4 – F5B) – HD – F1
If the result is negative, A = $0.

S1 = This is a set of two numbers: the number of total pay periods (or the employee’s pay periods if the employees worked less than the total pay periods) divided by the applicable number of the current pay period, as in the chart below. Also, see the information under “Special situations.”

Table 5.1 S1 Examples

Note:

F2 = Alimony or maintenance payments required by a legal document dated before May 1, 1997, to be deducted at source from the employee’s salary for the pay period plus F2_YTD. The legal document could be a garnishment or a similar order of a court or competent tribunal.

Note:

F4 = Employee registered pension plan or registered retirement savings plan contributions deducted from the year-to-date non-periodic payments. You can also use this field or design another to apply other tax-deductible amounts to the non-periodic payment, such as union dues

F5A = Deductions for Canada (or Quebec) Pension Plan additional contributions for the pay period deducted from the periodic income plus F5A_YTD.

Note:

F5B = Deductions for Canada (or Quebec) Pension Plan additional contributions for the pay period deducted from the non-periodic income plus F5B_YTD.

Note:

U1 = Union dues for the pay period, plus U1_YTD.

B1 = Year-to-date (before this pay period) non-periodic payments such as bonuses, retroactive pay increases, vacation pay when vacation is not taken, and accumulated overtime. Since tax on a current non-periodic payment is calculated separately, do not include the current non-periodic payment in calculating A.

Note:

Formula to calculate basic federal tax (T3)

T3 = (R × A) – K – K1 – K2 – K3 – K4
If the result is negative, T3 = $0.

Only for employees in Quebec:
T3 = (R × A) – K – K1 – K2Q – K3 – K4
If the result is negative, T3 = $0.

R and K are based on 2023 index values for A see the Rates (R, V), income thresholds (A), and constants (K, KP) for 2023 Table 8.1 in Chapter 8.

A = Projected annual taxable income

K1 = 0.15 × TC

K2 = [(0.15 × (0.0495 × ((S1 × PE) + B1 – $3,500)*, maximum $3,123.45)) + (0.15 × (0.0163 × ((S1 × IE) + B1), maximum $1,002.45))]
* If the result is negative, enter $0.

Only for employees in Quebec:
K2Q = [(0.15 × (0.0540 × ((S1 × PE) + B1 – $3,500)*, maximum $3,407.40)) + (0.15 × (0.0127 × ((S1 × IE) + B1), maximum $781.05)) + (0.15 × (0.00494 × S1 × IE) + B1), maximum $449.54))]
* If the result is negative, enter $0.

Where:
PE = Pensionable earnings for the pay period, or the gross income plus any taxable benefits for the pay period, plus PE_YTD
IE = Insurable earnings for the pay period including insurable taxable benefits for the pay period, plus IE_YTD

The above has to follow the rules in Chapter 6 – “Canada Pension Plan (CPP)” and Chapter 7 – “Employment Insurance (EI)” of this publication and the instructions contained in Guide T4001, Employers’ Guide – Payroll Deductions and Remittances.

K4 = The lesser of:
(i) 0.15 × A*;
(ii) 0.15 × CEA

CEA is an indexed amount. See Table 8.2 Other rates and amounts in Chapter 8.

* For the Canada employment amount, A is the annual gross income from office or employment before deductions. Only include the amounts from office or employment, this is the same amount you normally report in box 14 of the T4 slip (s).

Formula to calculate the federal tax payable (T1)

T1 = Annual federal tax deduction except for Quebec, outside Canada, and in Canada beyond the limits of any province or territory
= (T3 – LCF)*
* If the result is negative, enter $0.

Only for employees in Quebec:
T1 = (T3 – LCF)* – (0.165 × T3)
* If the result is negative, enter $0.

Only for employees outside Canada or in Canada beyond the limits of any province or territory:
T1 = [T3 + (0.48 × T3) – LCF]*
* If the result is negative, enter $0.

LCF = The lesser of:
(i) $750;
(ii) 15% of the amount deducted or withheld for the pay period for the acquisition by the employee of approved shares of the capital stock of a prescribed labour-sponsored venture capital corporation

Note:

Formulas to calculate provincial and territorial tax payable (T2)

We have not repeated the entire explanation for the provincial and territorial variables. Effective January 1, 2023, the variables for Option 2 are the same as for Option 1, except for factor K2P, which is as follows:

K2P = [(Lowest provincial or territorial tax rate × (0.0495 × ((S1 × PE) + B1 – $3,500)*, maximum $3,123.45)) + (lowest provincial or territorial tax rate × (0.0163 × ((S1 × IE) + B1), maximum $1,002.45))]
* If the result is negative, enter $0.

Replace the lowest provincial or territorial tax rate with the appropriate rate for the province or territory that applies to the employee or pensioner.

Only for employees in Quebec:
T2 = $0

Only for employees outside Canada or in Canada beyond the limits of any province or territory:
T2 = $0

Formulas to calculate the estimated federal and provincial or territorial tax deductions (T) for the pay period

T = [((T1 + T2 – M1) / S1) – M]* + L
* If the result is negative, T = L.
The resulting amount can be rounded to the nearest multiple of $0.05 or $0.01.

Only for employees in Quebec, outside Canada, and in Canada beyond the limits of any province or territory:
T = Estimated federal tax deduction for the pay period**
= [((T1 – M1) / S1) – M]* + L
* If the result is negative, T = L.
** The resulting amount can be rounded to the nearest multiple of $0.05 or $0.01.

M = Do not include any year-to-date extra tax deductions requested by the employee, factor L. Tax already deducted on non-periodic payments such as bonuses, is included in factor M1.

M1 = Accumulated federal and provincial (or territorial) tax deductions on non-periodic payments such as bonuses, if any, to the last pay period. Do not include any year-to-date extra tax deductions for the year requested by the
employee, factor L or any tax included in factor M. The T factor (tax deduction for the pay period) will not include the tax on the non-periodic payment. The tax to be deducted on a current non-periodic payment is kept in another field TB.

TB = Estimated federal and provincial or territorial tax deduction on a non-periodic payment for the pay period
= Step 1 minus Step 2 below (if negative, TB = $0)

Step 1
Projected annual taxable income including B1 and B payable now

A = [(S1 × (I – F – F2 – F5A – U1)) – HD – F1] + (B1– F4 – F5B_YTD) + (B – F3 – F5B)]

Step 2
Projected annual taxable income including B1, but not B payable now

A = [(S1 × (I – F – F2 – F5A – U1)) – HD – F1] + (B1 – F4 – F5B_YTD)]

Chapter 6 – Canada Pension Plan (CPP)

For the following formulas, round the resulting amount to the nearest $0.01.

Note:

Formula to calculate CPP contributions for employees receiving salary or wages

C = The lesser of:
(i) $3,754.45* × (PM/12) – D*;
(ii) 0.0595* × [PI – ($3,500 / P)]
If the result is negative, C = $0.

* For employees employed in Quebec
use the QPP max contribution amount of $4,038.40 instead of $3,754.45;
use DQ instead of D;
use the QPP contribution rate of 0.0640 instead of 0.0595.

Formula to calculate CPP contributions — only for employees paid by commission

C = The lesser of:
(i) $3,754.45* × (PM/12) – D*;
(ii) 0.0595* × [G – ($3,500 × N / 365, minimum $67.30)]
If the result is negative, C = $0.

* For employees employed in Quebec
use the QPP max contribution amount of $4,038.40 instead of $3,754.45;
use DQ instead of D;
use the QPP contribution rate of 0.0640 instead of 0.0595.

Formula to calculate CPP contributions for employees who were transferred by their employer from Quebec to a location outside Quebec during the year receiving salary or wages

C = The lesser of:
(i) $3,754.45 × (PM/12) – [(DQ × (0.0595/0.0640)*) + D];
(ii) 0.0595 × [PI – ($3,500 / P)]
If the result is negative, C = $0.
* No rounding required for this factor.

Formula to calculate CPP contributions for employees who were transferred by their employer from Quebec to a location outside Quebec — only for employees paid by commission

C = The lesser of:
(i) $3,754.45 × (PM/12) – [(DQ × (0.0595/0.0640)*) + D];
(ii) 0.0595 × [G – ($3,500 × N / 365, minimum $67.30)]
If the result is negative, C = $0.
* No rounding required for this factor.

Formula to calculate QPP contributions for employees who were transferred by their employer to Quebec from a location outside Quebec during the year receiving salary or wages

C = The lesser of:
(i) $4,038.40 × (PM/12) – [(D × (0.0640/0.0595)*) + DQ];
(ii) 0.0640 × [PI – ($3,500.00 / P)]
If the result is negative, C = $0.
* No rounding required for this factor.

Formula to calculate QPP contributions for employees who were transferred by their employer to Quebec from a location outside Quebec during the year — only for employees paid by commission

C = The lesser of:
(i) $4,038.40 × (PM/12) – [(D × (0.0640/0.0595)*) + DQ];
(ii) 0.0640 × [G – ($3,500.00 × N / 365, minimum $67.30)]
If the result is negative, C = $0.
* No rounding required for this factor.

Note:

Each employer needs to deduct CPP contributions based on the employee’s pensionable income, without regard to any other earnings the employee may have had with another employer in the same year. Accordingly, you must use the maximum above even if the employee works for you less than 12 months. Similarly, you are not entitled to a refund of the employer’s share of CPP if the employee works for you less than 12 months.

For payments where the employee receives remuneration such as a bonus, retroactive pay increase, vacation pay when vacation is not taken, or accumulated overtime pay, and the payment is not included with the regular remuneration for the current pay period, you should introduce a code or use the factor B with the record. Also do this if a non-periodic payment is made and no regular remuneration is paid in the pay period. You do this to avoid allowing the basic exemption for the pay period ($3,500 / P) in the formula described above.

The basic exemption amount ($3,500 / P) used to determine the employee’s contributions for the pay period has to stay the same throughout the year, regardless of whether an employee has worked in each week of the pay period.

Also, you should determine the number of pay periods at the start of the year (for example, for weekly, you can have 52 or 53 pay periods and, for biweekly, you can have 26 or 27 pay periods.) This is to make sure that you have deducted employee contributions properly.

Special CPP situations

You will have to either start or stop deducting CPP contributions under the following circumstances:

Your employee turns 18 – Start deducting CPP contributions for the first pay dated in the month after the employee turns 18.

Your employee turns 70 – Deduct CPP contributions up to and including the last pay dated in the month in which the employee turns 70.

Your employee gives you a completed Form CPT30 – The employee can either stop or start contributing to CPP by filling out Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or a Revocation of a Prior Election. This election is effective on the first day of the month following the receipt of the completed form.

For detailed information and examples, refer to T4001 Employers’ Guide – Payroll Deductions and Remittances.

In regards to the situations where the PM for the year is known, use the same PM for the K2 formulas throughout the year.

Employee’s CPP basic exemption for various pay periods

Table 6.1 Basic exemption

Note:

Example:

Chapter 8 – Rates and amounts

To download the Chapter 8 tables in comma-separated value (CSV) format see the T4127 Payroll Deductions Formulas website.

Table 8.1 Rates (R, V), income thresholds (A), and constants (K, KP) for 2023