About the deduction of income tax – Calculate payroll deductions and contributions

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Calculate payroll deductions and contributions


About the deduction of income tax

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What are taxable earnings

As an employer or a payer, you are required to deduct federal and provincial or territorial income tax from remuneration and other income that you pay.

You need to determine which provincial or territorial income tax you are required to deduct based on the province of employment of the employee.

Learn more: Determine the province of employment (POE).

Generally, you have to deduct income tax from:

  • Salary, wages, commissions or other remuneration including taxable benefits
  • Honorariums from employment or office, director's fees, management fees, fees paid to board or committee members and executor's, liquidator's, or administrator's fees earned to administer an estate (as long as the executor, liquidator, or administrator does not act in this capacity in the regular course of business).
  • Bonuses/retroactive pay increases and vacation pay.
  • Wages in lieu of termination notice.
  • Remuneration paid while the employee is on vacation, furlough, sabbatical, or sick leave, or for lost-time pay from a union, vacation pay, benefits paid under a supplementary unemployment benefit plan to a trustee for payment of periodic amounts to employees who are laid off for any temporary or indefinite period (such as employer paid maternity and parental top-up amounts) and payments for sick leave credits and accrued vacation.
  • Wage-loss replacement plans benefits.
  • Tips and gratuities:
    • Tips and gratuities that are controlled by you and received from the performance of services are considered income from employment.
    • In the province of Quebec, declared tips required to be reported by employees in the restaurant, bar or hotel sectors to their employers.
  • Additional amounts that you pay while participating in a job creation project that Employment and Social Development Canada (ESDC) has approved.
  • Remuneration paid to a member of a religious order who has taken a vow of perpetual poverty, unless you pay the remuneration to the order or the employee gives you a letter of authority.

To determine if you need to deduct income tax, refer to:

When to deduct income tax

You are responsible for deducting income tax from the remuneration or other income you pay to your employees.

Income tax deductions:

  • start to be deducted from the first dollar earned
  • have no age limit for deducting them
  • have no maximum deduction amount or maximum earnings for deductions to be taken from
  • have no employer contribution

To determine how much income tax to deduct, you may need the following to determine the employee's income tax deductions, including the basic personal amount:

  • Federal form – TD1: To be filled out by individuals that have a new employer or payer, or want to change amounts from previous amounts claimed, or want to claim the deduction for living in a prescribed zone or want to increase income tax deductions
  • Provincial and territorial form – TD1: To be filled out by all individuals that are claiming more than the basic personal amount based on their province of employment
  • Form TD1X: To be filled out by employees that are paid by commission and who claim expenses
  • TD1-IN: To be filled out by employees who are registered, or entitled to be registered under the Indian Act
  • TD3F: To be filled out by self-employed fishers

Learn more: Get the completed TD1 forms.

What types of deductions will reduce remuneration subject to tax

You need to subtract the following deductions from remuneration when calculating tax deductions:

  • A deduction for living in a prescribed zone
  • An amount that a tax services office has authorized
  • Employee's contributions to a registered pension plan (RPP)
  • Union dues paid by the employee, to the extent that the employee has not been reimbursed and is not entitled to be reimbursed
  • Employee's contributions to a retirement compensation arrangement (RCA) or certain pension plans
  • Premiums under a registered retirement savings plan (RRSP) provided you have reasonable grounds to believe the employee can deduct the premiums for the year
  • Employee's contributions to a pooled registered pension plan (PRPP), or a specified pension plan (which includes the Saskatchewan Pension Plan) , as long as the plan is registered with the Minister of National Revenue and you have reasonable grounds to believe the employee can deduct the contributions for the year
  • Beginning January 1, 2023 First and second additional contributions to the CPP made by the employee
  • Beginning April 1, 2023 Employee’s contributions to a First Home Retirement Savings Account (FHSA) and you have reasonable grounds to believe the employee can deduct the contribution for the year

Calculation example

David is paid weekly (52 pay periods per year). The remuneration that requires tax deductions will be his gross weekly remuneration minus the weekly deductions.

Step 1: Calculate the gross weekly remuneration
His gross weekly remuneration is equal to his basic weekly salary of $500 plus his taxable benefits of $50.00. The total is $550.00.

Step 2: Calculate the weekly deductions
The weekly deductions are equal to his RPP contributions of $25.00 plus union dues deductions of $5.50 plus his deduction for living in a prescribed zone of $77.00 ($11.00 per day × 7 days). The total weekly deductions amount is $107.50.

Step 3: Calculate the weekly net remuneration on which you have to deduct income tax
Subtract the weekly deductions amount you calculated in step 2 from the gross weekly remuneration in step 1. The result will be the net weekly remuneration on which you have to deduct income tax.

The gross weekly remuneration of $550 minus the total weekly deductions of $107.50 equals the remuneration that requires tax deductions at source of $442.50.

What if the employee has different jobs

Each employer must deduct income tax from the remuneration or other income they have paid to their employees regardless of whether they have other employers in the year. If the employee has already claimed personal tax credit amounts in the year on Form TD1 with another employer, they cannot claim them again when starting employment with you.

What to do if you have employees whose province of employment is Quebec

If you pay your employee remuneration or other income and their province of employment is Quebec, as well as deducting federal income tax, you will also have to deduct Quebec provincial income tax and remit the provincial tax to Revenu Quebec.

Learn more: Source Deductions of Québec Income Tax | Revenu Québec (revenuquebec.ca).

What to do if you have employees outside Canada

If you have Canadian resident employees working outside Canada, you generally have to deduct income tax.

Your employee may be entitled to a foreign tax credit in Canada for income taxes paid in the foreign country by requesting a letter of authority to reduce their deductions of Canadian income tax.

Learn more: Increase or reduce income tax deducted at source.

What to do if your employee requested to increase income tax deductions

If your employee filled out a TD1 form requesting an increase to income tax deductions, you need to increase the income tax deduction from each payment by the amount requested on the form.

Learn more: Increase or reduce income tax deducted at source.

What to do if your employee requested to reduce the income tax deducted

If your employee received a letter of authority (tax waiver) to reduce tax deductions at source, you need to reduce the income tax deduction by the amount specified in the letter of authority.

If you received the blanket waiver letter and completed declaration of intent forms, you need to reduce the lump sum payment by the amount on the declaration of intent in order to calculate the taxable amount of the lump sum payment.

Learn more: Increase or reduce income tax deducted at source.

References

Legislation

ITA: 153(1)
Requirement to deduct and remit
ITA: 153(1.2)
Election to increase withholding
ITR: 100(1)
Interpretation
ITR: 100(3)
Deductions from the payment of remuneration
ITR: 100(4)
Province of employment
ITR: 101
Deductions and remittances
ITR: 102
Periodic payments
ITR: 103
Non-periodic payments
ITR: 107
Employee’s returns
ITR: 109(1)
Elections to increase deductions

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Date modified:
2024-09-09

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