T4127(E) Rev. 16

La version française de cette publication est intitulée Formules pour le calcul informatisé des retenues sur la paie – 103e édition.

Table of contents

• What's new for January 1, 2016?
  • Federal changes
    • Indexing
  • Canada Pension Plan (CPP)
  • Quebec Pension Plan (QPP)
  • Employment insurance (EI)
  • Provincial and territorial tax changes
    • Alberta
    • British Columbia
    • New Brunswick
    • Newfoundland and Labrador
    • Northwest Territories
    • Nunavut
    • Ontario
    • Saskatchewan
    • Yukon
• Chapter 1 – General information
  • Rounding procedures
  • Tax deductions comparison
• Chapter 2 – Personal tax credits returns (TD1 forms)
  • Federal Form TD1, 2016 Personal Tax Credits Return
  • Indexing of personal amounts
• Chapter 3 – Claim codes
  • Federal, provincial, and territorial claim codes
• Chapter 4 – Glossary
• Chapter 5 – Option 1 – Tax formula
  • Formula to calculate annual taxable income (A)
  • Formula to calculate basic federal tax (T3)
  • Formula to calculate the annual federal tax payable (T1)
  • Tax calculation formula for bonuses, retroactive pay increases, and other non-periodic payments
  • Formula to calculate annual basic provincial or territorial tax (T4)
  • Formulas to calculate the annual provincial or territorial tax deduction (T2)
    • Alberta:
    • British Columbia:
    • Manitoba:
    • New Brunswick:
    • Newfoundland and Labrador:
    • Northwest Territories:
    • Nova Scotia:
    • Nunavut:
    • Ontario:
    • Prince Edward Island:
    • Quebec:
    • Saskatchewan:
    • Yukon:
  • Formula to calculate the estimated federal and provincial or territorial tax deductions (T) for the pay period
• Chapter 6 – Option 2 – Tax formula based on cumulative averaging
  • Calculation of income
  • Calculation of tax for the pay period
  • Special situations
  • Formula to calculate annual taxable income (A)
  • Formula to calculate basic federal tax (T3)
  • Formula to calculate the federal tax payable (T1)
  • Formula to calculate provincial and territorial tax payable (T2)
  • Formula to calculate the estimated federal and provincial or territorial tax deductions (T) for the pay period
• Chapter 7 – Canada Pension Plan (CPP)
  • Formula to determine CPP contributions for employees receiving salary or wages
  • Formula to determine CPP contributions—only for employees paid by commission
    • Special CPP situations
  • Employee's CPP basic exemption for various pay periods
• Chapter 8 – Employment Insurance (EI)
  • Formula to calculate EI premiums
• Chapter 9 – Summary sheets
  • Summary sheet for January 2016
  • Summary sheet for January 2015

Is this guide for you?

Use this guide if you are a payroll software provider or a company which develops its own in-house payroll solution.

This guide has the formulas you need to determine federal, provincial (except Quebec), and territorial income taxes, Canada Pension Plan (CPP) contributions, and employment insurance (EI) premium deductions. The formulas also let you calculate payroll deductions for special cases such as commission, pension income, bonuses, and retroactive pay increases.

The formulas used in this guide to calculate statutory deductions have been approved for purposes of the Income Tax Act, the Canada Pension Plan, and the Employment Insurance Act, as well as their related regulations and any amendments proposed to these acts.

For more information on income amounts that are subject to payroll deductions, see Publication T4001, Employers' Guide – Payroll Deductions and Remittances.

If you have questions about the formulas in this guide, contact your tax services office or tax centre. For the address and telephone numbers of your tax services office or tax centre, see the listings in the government section of your telephone book or visit our website at www.cra.gc.ca.

Distribution of this guide

This guide is available in electronic format only.

Electronic mailing lists – more ways to serve you!

We provide an electronic service that can notify you immediately, free of charge, of any changes for payroll deductions.

To subscribe, go to www.cra.gc.ca/lists and enter your business's email address for each mailing list that you want to join.

Payroll Deductions Online Calculator

For your payroll deductions, you can use our Payroll Deductions Online Calculator (PDOC). The calculator includes an option to help you make sure that enough Canada Pension Plan contributions and employment insurance premiums have been withheld for full-year employees. It calculates payroll deductions for the most common pay periods, as well as the applicable province (except Quebec) or territory. The calculation is based on exact salary figures.

PDOC is available at www.cra.gc.ca/pdoc.

Payroll Deductions Tables

You can download Publication T4032, Payroll Deductions Tables and Publication T4008, Payroll Deductions Supplementary Tables, from our website at www.cra.gc.ca/payroll. You can also choose to print only the pages or information that you need.

What's new for January 1, 2016?

This guide reflects some income tax changes recently announced which, if enacted as proposed, would be effective January 1, 2016. At the time of publishing, these proposed changes were not law. We recommend that you use the Payroll Deductions Online Calculator (PDOC), Publication T4032, Payroll Deductions Tables, or Publication T4008, Payroll Deductions Supplementary Tables, and the formulas in this guide for withholding, starting with your first payroll in 2016.

Federal changes

Indexing

The income tax thresholds and many of the personal amounts on the federal Form TD1, Personal Tax Credits Return, are indexed for 2016. Indexing means that the values are adjusted based on changes to the consumer price index. The federal indexing factor for 2016 is 1.3%.

Federal income thresholds

The income thresholds and personal amounts are indexed. The current and previous figures can be found in chapter 9 – "Summary sheets" at the end of the publication.
The claim codes amounts are also indexed. The revised figures can be found in chapter 3 – "Claim codes".

Federal personal amounts

Some federal personal amounts were increased as a result of federal indexing.

For complete information on all personal amounts for 2016, see the 2016 federal Form TD1, Personal Tax Credits Return.

Canada employment credit

The Canada employment credit (factor K4) is the lesser of:

1. 0.15 × A; and
2. 0.15 × $1,161.

Federal labour-sponsored funds tax credit

As first stated in the 100th version of this guide, the federal labour-sponsored funds tax credit (LCF) will be phased out. Modify your payroll program to the 2016 rate (5%) according to the following schedule:

Canada Pension Plan (CPP)

For 2016, the maximum CPP pensionable earnings are $54,900, and the basic exemption for the year is $3,500. The contribution rate for employees is 4.95%.

The maximum an employee can contribute for the year is $2,544.30. The employer's contribution is an amount equal to the total of the employee's contributions.

For insurance companies that need the year's maximum pensionable earnings before rounding, the amount for this year is $54,944.75.

Quebec Pension Plan (QPP)

For 2016, the QPP contribution rate for employees is 5.325%. The maximum an employee can contribute for the year is $2,737.05. The employer's contribution is an amount equal to the total of the employee's contributions.

Employment insurance (EI)

For 2016 in Canada (except Quebec), the maximum annual insurable earnings are $50,800 and the EI premium rate is 1.88%, for a maximum annual premium of $955.04. In Quebec, the premium rate is 1.52%, for a maximum annual premium of $772.16.

The maximum earnings for the Quebec Parental Insurance Plan (QPIP) for 2016 are $71,500 with a rate of 0.548%, for a maximum annual premium of $391.82.

When an employee changes province or territory of employment during the year but stays with the same employer, the maximum premium for the year will vary based on the province or territory where the first $50,800 of insurable earnings are paid.

Provincial and territorial tax changes

You will find below the provincial and territorial tax changes effective January 1, 2016. The current and previous figures can be found in Chapter 9 – "Summary sheets" at the end of the publication.

Some of the provincial and territorial claim codes amounts are also indexed. The revised figures can be found in chapter 3 – "Claim codes".

Please note that that there is no change for Manitoba, Nova Scotia, Prince Edward Island, Quebec, or Outside Canada.

Alberta

The income thresholds are not indexed. Personal amounts have been indexed. The provincial indexing factor for 2016 is 1.3%.

For complete information on personal amounts, see Form TD1AB.

British Columbia

The income thresholds and tax reduction values are indexed. The provincial indexing factor for 2016 is 0.9%.

For complete information on personal amounts, see Form TD1BC.

Provincial tax reduction

The provincial tax reduction for British Columbia is indexed and is calculated as follows:

• If net income is less than or equal to $19,171, the reduction is equal to the lesser of (i) basic provincial tax and (ii) $436.
• If net income is more than $19,171 and less than or equal to $31,628.14, the reduction is equal to the lesser of (i) basic provincial tax and (ii) $436 – [(Annual net income – $19,171) × 3.5%].
• If net income is more than $31,628.14, there is no reduction.

New Brunswick

The income thresholds and personal amounts are indexed. The indexing factor for 2016 is 1.3%.

For complete information on personal amounts, see Form TD1NB.

Newfoundland and Labrador

The income thresholds and personal amounts are indexed. The provincial indexing factor for 2016 is 0.4%.

For complete information on personal amounts, see Form TD1NL.

Northwest Territories

The income thresholds and personal amounts are indexed. The indexing factor for 2016 is 1.3%.

For complete information on personal amounts, see Form TD1NT.

Nunavut

The income thresholds and personal amounts are indexed. The indexing factor for 2016 is 1.3%.

For complete information on personal amounts, see Form TD1NU.

Ontario

The income thresholds and personal amounts have been indexed. The provincial indexing factor for 2016 is 1.5%.

For complete information on personal amounts, see Form TD1ON.

Ontario provincial surtax

The Ontario provincial surtax thresholds for 2016 are as follows:

• If the basic provincial tax payable (T4) is less than or equal to $4,484, the surtax payable (V1) is $0.
• If the basic provincial tax payable (T4) is more than $4,484 and less than or equal to $5,739, the surtax payable (V1) is 20% of the basic provincial tax payable that is over $4,484.
• If the basic provincial tax payable (T4) is more than $5,739, the surtax payable (V1) is the total of 20% of the basic provincial tax payable that is over $4,484 and 36% of the basic provincial tax payable that is over $5,739.

Provincial tax reduction

The provincial tax reduction for Ontario has changed as a result of provincial indexing. When possible, you should implement the Y factor based on the total of the applicable amounts shown on the employee's or pensioner's Form TD1ON. If you do not use the Y factor, any over deduction of tax will be adjusted when the individual files an income tax and benefit return.

The provincial tax reduction amounts for 2016 are as follows:

• $231 for the basic personal amount;
• $427 for each dependant under age 19*; and
• $427 for each dependant with a disability that the employee or pensioner has claimed on Form TD1ON.

*Since the tax reduction for dependants under age 19 is not shown on Form TD1ON, the employee or pensioner will have to provide the employer or payer with a written or electronic request to include such amounts.

• The reduction is equal to twice the individual's personal amounts minus the Ontario income tax. The reduction cannot be more than the Ontario income tax otherwise payable. There is no reduction when that tax is more than twice the personal amounts.

Saskatchewan

The income thresholds and personal amounts for Saskatchewan are indexed. The indexing factor for 2016 is 1.3%.

For complete information on personal amounts, see Form TD1SK.

Yukon

The income thresholds and personal amounts are indexed. The indexing factor for 2016 is 1.3%.

For complete information on personal amounts, see Form TD1YT.

Territorial Canada employment credit

Yukon's territorial Canada employment credit, designated as factor K4P, has been increased to $1,161.

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.

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 Publication T4032, Payroll Deductions Tables, the amounts will not necessarily be the same. Any difference results from the fact that the amounts in Publication T4032 are based on:

1. the mid-point of the range of remuneration under the "Pay" column;
2. 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); and
3. the midpoint 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 (TD1 forms)

Federal Form TD1, 2016 Personal Tax Credits Return

Form TD1 was revised for 2016.

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.

Indexing of personal amounts

Each year, certain personal tax credit amounts are indexed based on changes to the consumer price index. 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:

* For Alberta and Ontario only, do not include any amounts on line 2, since all Alberta and Ontario credits are indexed.

** Some changes to Yukon personal amounts are not directly attributable to indexing, because they have harmonized amounts with the federal values.

No indexing applies to Nova Scotia, Prince Edward Island, or Manitoba.

Chapter 3 – Claim codes

You have to deduct tax according to the claim code. The claim code depends on the total personal amount an employee claims on Form TD1.

Claim code 0

This code represents no claim amount allowed. If the federal claim code is 0 because the employee is a non-resident, the provincial claim code must also be 0.

Federal, provincial, and territorial claim codes

The claim amounts that correspond to the federal claim codes are different than the claim amounts that correspond to the provincial or territorial claim codes. Below is a listing of claim codes and amount ranges.

Chapter 4 – Glossary

All factor definitions appear only in the Glossary unless further details are required in specific situations.

Chapter 5 – Option 1 – Tax formula

This option determines the federal and provincial or territorial tax deductions on salary, wages, taxable benefits, pension income, commissions, and other periodic payments. This option can also be used to calculate the tax on a bonus or other non-periodic payment.

We use Option 1, with the exception of a few factors, to determine the tax deduction amounts in Publication T4032, Payroll Deductions Tables, and T4008, Payroll Deductions Supplementary Tables, for each province and territory, as well as for Canada beyond the limits of any province or territory and outside Canada.

Outline of Option 1

In general, the Option 1 steps are as follows:

1. Determine the net taxable income for the pay period (pay minus allowable deductions) and multiply it by the number of pay periods in the year to get an estimated annual taxable income amount. This annual taxable income amount is factor A.
2. Calculate the basic federal tax on the estimated annual taxable income, after allowable federal personal tax credits. The basic federal tax is factor T3.
3. Calculate the annual federal tax payable. This is factor T1.
4. Calculate the basic provincial or territorial tax on the estimated annual taxable income, after allowable provincial or territorial personal tax credits. The annual basic provincial or territorial tax is factor T4.
5. Calculate the annual provincial or territorial tax deduction. This is factor T2.
6. To get the estimated federal and provincial or territorial tax deductions for a pay period, add the federal and provincial or territorial tax, and divide the result by the number of pay periods. This is factor T.

Special rules apply to determine the annual income for employees paid by commissions. A calculation is provided to determine the tax deductions for bonuses, retroactive pay increases, and other non-periodic payments.

Formula to calculate annual taxable income (A)

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

Only for employees paid by commission:

A = I1 − F* − F2* − U* − 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:
Weekly P = 52 (or 53 where applicable)
Biweekly P = 26 (or 27 where applicable)
Semi-monthly P = 24
Monthly P = 12
Other P = 10, 13, 22, or any other number of pay periods for the year

F2 = In situations where a garnishment or a similar order of a court or competent tribunal states that the alimony or maintenance payment cannot be more than a certain percentage of the employee's net salary (net salary as defined in the garnishment or order), more calculations may be required, as follows:

1. Calculate the tax deduction amount and the net salary amount using the alimony or maintenance amount shown in the garnishment or order.
2. Determine the alimony or maintenance payment to be withheld (F2). This will be either the maximum allowable as a percentage of the employee's net salary calculated in 1. or the amount shown in the garnishment or order, whichever is less.
3. Determine the tax deduction for the pay period using the F2 amount in 2.

F1 = If the F1 amount is implemented after the first pay period in the year, F1 must be adjusted using the following formula:

(P × F1) ÷ PR

Formula to calculate basic federal tax (T₃)

T3 = Annual basic federal tax
= (R × A) − K − K1 − K2 − K3 − K4
If the result is negative, T3 = $0.

Only for employees in Quebec:

(R × A) − K − K1 − K2Q − K3 − K4
If the result is negative, T3 = $0.

R =

K1 = 0.15 × TC

K2 = [(0.15 × (P x C, maximum $2,544.30)) + (0.15 x (P × EI, maximum $955.04))]*

Only for employees in Quebec:

K2Q = Quebec Pension Plan contributions, employment insurance premiums, and Quebec Parental Insurance Plan premiums federal tax credits for the year

= [(0.15 × (P × C, maximum $2,737.05)) + (0.15 × (P × EI, maximum $772.16)) + (0.15 × (P × IE × 0.00548, maximum $391.82))]*

In either case, for the rest of the pay periods in the year, (P × C), (P × EI), or (P × IE × 0.00548) (as applicable) is replaced by the maximum annual deduction(s). This modification ensures that the employee will get the maximum CPP, EI, and QPIP tax credit for the rest of the pay periods in the year.

If you want to use a year-to-date method to calculate CPP, EI, and QPIP federal tax credits, (P × C) and (P × EI) can be modified as follows:

(P × C) is changed to the lesser of:
(i) $2,544.30; and
(ii) Year-to-date C + (PR × C).

(P × EI) is changed to the lesser of:
(i) $955.04; and
(ii) Year-to-date EI + (PR × EI).

Only for employees in Quebec:

(P × EI) is changed to the lesser of:
(i) $772.16; and
(ii) Year-to-date EI + (PR × EI).

(P × IE × 0.00548) is changed to the lesser of:
(i) $391.82; and
(ii) Year-to-date QPIP + (PR × IE × 0.00548).

Only for employees paid by commission:

K2 = [(0.15 × (0.0495 × (I1 – $3,500)*, maximum $2,544.30)) + (0.15 × (0.0188 × I1, maximum $955.04))]
* If the resulting amount is negative, enter $0.

Only for employees in Quebec:

K2Q = [(0.15 × (0.05325 × (I1 – $3,500)*, maximum $2,737.05)) + (0.15 × (0.0152 × I1, maximum $772.16)) + (0.15 × (0.00548 × I1, maximum $391.82))]
* If the resulting amount is negative, enter $0.

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; and
(ii) 0.15 × $1,161.

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 − 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 and in Canada beyond the limits of any province or territory:

T1 = [T3 + (0.48 × T3) − LCF]*
* If result is negative, enter $0.

LCF = The lesser of:
(i) $250; and
(ii) 5% of the amount deducted or withheld during the year for the acquisition, by the employee, of approved shares of the capital stock of a prescribed labour-sponsored venture capital corporation.

Tax calculation formula 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.

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; and
(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 − U1)] − HD − F1)* + (B − F3)**+ (B1 − F4)**

* If the result is negative, enter $0.
** Result cannot be negative, and result cannot be negative after deducting CPP and EI.

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 − U1)] − HD − F1)* + (B1 − F4)**

* If the result is negative, enter $0.
** Result cannot be negative, and result cannot be negative after deducting CPP and EI.

If there is no current I, 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 = [(IYTD − FYTD − F2YTD − U1YTD) + (PR × (I − F − F2 − U1)) − F1 − HD]* + (B − F3)**+ (B1 − F4)**

* If the result is negative, enter $0.
** Result cannot be negative, and result cannot be negative after deducting CPP and EI.

Step 2

A = [(IYTD – FYTD – F2YTD – U1YTD) + (PR × (I – F – F2 – U1)) – F1 – HD]* + (B1 – F4)**

* If the result is negative, enter $0.
** Result cannot be negative, and result cannot be negative after deducting CPP and EI.

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. $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 $30,000, year-to-date RPP is $1,350, 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 a previous bonus of $1,000 with only CPP, EI, and tax withheld from it.

Step 1

A = Annual taxable income with the non-periodic payment payable now
= [(IYTD – FYTD – F2YTD – U1YTD) + (PR × (I – F – F2 – U1)) – F1 – HD]* + (B – F3)**+ (B1 – F4)**
= [($30,000 – $1,350 – $0 – $150) + (22 × ($1,100 – $45 – $0 – $5)) – $0 – $0] + ($2,500 – $1,000) + ($1,000 – $0)
= $28,500 + (22 × $1,050) + $1,500 + $1,000
= $54,100

Step 2

A = Annual taxable income without the non-periodic payment payable now
= [(IYTD − FYTD − F2YTD − U1YTD) + (PR × (I − F − F2 − U1)) − F1 − HD]* + (B1 − F4)**
= [($30,000 − $1,350 − $0 − $150) + (22 × ($1,100 − $45 − $0 − $5)) − $0 − $0] + ($1,000 − $0)
= $28,500 + (22 × $1,050) + $1,000
= $52,600

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 for regular remuneration.

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.

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

T2 = T4 + V1 + V2 − S − 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

Alberta:

T2 = T4 + V1 − S − LCP
If the result is negative, T2 = $0.

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

Where V and KP are based on the value of A in the 2016 Alberta tax rates and income thresholds table.

K1P = 0.10 × TCP
K2P = [(0.10 × (P × C, maximum $2,544.30)) + (0.10 × (P × EI, maximum $955.04))]*
V1, S, and LCP = $0

British Columbia:

T2 = T4 + V1 − S − LCP
If the result is negative, T2 = $0.

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

Where V and KP are based on the value of A in the 2016 British Columbia tax rates and income thresholds table.

K1P = 0.0506 × TCP

K2P = [(0.0506 × (P × C, maximum $2,544.30)) + (0.0506 × (P × EI, maximum $955.04))]*

V1 = $0

S = Where A ≤ $19,171, S is equal to the lesser of:
(i) T4; and
(ii) $436.

= Where A > $19,171 ≤ $31,628.14, S is equal to the lesser of:
(i) T4; and
(ii) $436 − [(A − $19,171) × 3.5%].

= Where A > $31,628.14

= $0

LCP = The lesser of:
(i) $2,000; and
(ii) 15% of the amount deducted or withheld during the year for the acquisition by the employee of approved shares of the capital stock of a prescribed labour-sponsored venture capital corporation.

Manitoba:

T2 = T4 + V1 − S − LCP
If the result is negative, T2 = $0.

Where:
T4 = (V × A) − KP − K1P − K2P − K3P
Where V and KP are based on the value of A in the 2016 Manitoba tax rates and income thresholds table.

K1P = 0.108 × TCP

K2P = [(0.108 × (P × C, maximum $2,544.30)) + (0.108 × (P × EI, maximum $955.04))]*

V1 and S = $0

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

New Brunswick:

T2 = T4 + V1 − S − LCP
If the result is negative, T2 = $0.

Where:
T4 = (V × A) − KP − K1P − K2P − K3P
Where V and KP are based on the value of A in the 2016 New Brunswick tax rates and income thresholds table.

K1P = 0.0968 × TCP

K2P = [(0.0968 × (P × C, maximum $2,544.30)) + (0.0968 × (P × EI, maximum $955.04))]*

V1 and S = $0

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

Newfoundland and Labrador:

T2 = T4 + V1 − S − LCP
If the result is negative, T2 = $0.

Where:
T4 = (V × A) − KP − K1P − K2P − K3P
Where V and KP are based on the value of A in the 2016 Newfoundland and Labrador tax rates and income thresholds table.

K1P = 0.077 × TCP

K2P = [(0.077 × (P × C, maximum $2,544.30)) + (0.077 × (P × EI, maximum $955.04))]*

V1 and S= $0

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

Northwest Territories:

T2 = T4 + V1 − S − LCP
If the result is negative, T2 = $0.

Where:
T4 = (V × A) − KP − K1P − K2P − K3P
Where V and KP are based on the value of A in the 2016 Northwest Territories tax rates and income thresholds table.

K1P = 0.059 × TCP

K2P = [(0.059 × (P × C, maximum $2,544.30)) + (0.059 × (P × EI, maximum $955.04))]*

V1, S, and LCP = $0

Nova Scotia:

T2 = T4 + V1 − S − LCP
If the result is negative, T2 = $0.

Where:
T4 = (V × A) − KP − K1P − K2P − K3P
Where V and KP are based on the value of A in the 2016 Nova Scotia tax rates and income thresholds table.

K1P = 0.0879 × TCP

K2P = [(0.0879 × (P × C, maximum $2,544.30)) + (0.0879 × (P × EI, maximum $955.04))]*

V1 and S = $0

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

Nunavut:

T2 = T4 + V1 − S − LCP
If the result is negative, T2 = $0.

Where:
T4 = (V × A) − KP − K1P − K2P − K3P
Where V and KP are based on the value of A in the 2016 Nunavut tax rates and income thresholds table.

K1P = 0.040 × TCP

K2P = [(0.040 × (P × C, maximum $2,544.30)) + (0.040 × (P × EI, maximum $955.04))]*

V1, S, and LCP = $0

Ontario:

T2 = T4 + V1 + V2 − S − LCP
If the result is negative, T2 = $0.

Where:
T4 = (V × A) − KP − K1P − K2P − K3P
Where V and KP are based on the value of A in the 2016 Ontario tax rates and income thresholds table.

K1P = 0.0505 × TCP

K2P = [(0.0505 × (P × C, maximum $2,544.30)) + (0.0505 × (P × EI, maximum $955.04))]*

V1= Where T4 ≤ $4,484,
V1 = $0
Where T4 > $4,484 ≤ $5,739,
V1 = 0.20 × (T4 − $4,484)
Where T4 > $5,739,
V1 = 0.20 × (T4 − $4,484) + 0.36 × (T4 − $5,739)

V2 = Where A ≤ $20,000, V2 = $0
Where A > $20,000 ≤ $36,000, V2 = the lesser of:
(i) $300; and
(ii) 0.06 × (A − $20,000).

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

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

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

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

S = The lesser of:
(i) T4 + V1; and
(ii) [2 × ($231 + Y)] − [T4 + V1].

If the result is negative, S = $0.

Where:
Y = The total of the following amounts:

• $427 multiplied by the number of disabled dependants as shown on Form TD1ON; and
• $427 multiplied by the number of dependants under age 19 for which the employee or pensioner has made a written or electronic request.

LCP = $0

Prince Edward Island:

T2 = T4 + V1 − S − LCP
If the result is negative, T2 = $0.

Where:
T4 = (V × A) − KP − K1P − K2P − K3P
Where V and KP are based on the value of A in the 2016 Prince Edward Island tax rates and income thresholds table.

K1P = 0.098 × TCP

K2P = [(0.098 × (P × C, maximum $2,544.30)) + (0.098 × (P × EI, maximum $955.04))]*

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

S and LCP = $0

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
Québec (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 Publication T4032QC, Payroll Deductions Tables.

Saskatchewan:

T2 = T4 + V1 − S − LCP
If the result is negative, T2 = $0.

Where:
T4 = (V × A) − KP − K1P − K2P − K3P
Where V and KP are based on the value of A in the 2016 Saskatchewan tax rates and income thresholds table.

K1P = 0.11 × TCP

K2P = [(0.11 × (P × C, maximum $2,544.30)) + (0.11 × (P × EI, maximum $955.04))]*

V1 and S = $0

LCP = The lesser of:
(i) $1,000; and
(ii) 20% of the amount deducted or withheld during the year for the acquisition by the employee of approved shares of the capital stock of a prescribed labour-sponsored venture capital corporation.

Yukon:

T2 = T4 + V1 − S − LCP
If the result is negative, T2 = $0.

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

Where V and KP are based on the value of A in the 2016 Yukon tax rates and income thresholds table.

K1P = 0.064 × TCP

K2P = [(0.064 × (P × C, maximum $2,544.30)) + (0.064 × (P × EI, maximum $955.04))]*

K4P = The lesser of:
(i) 0.064 × A; and
(ii) 0.064 × $1,161.

V1= $0

S= $0

LCP = The lesser of:
(i) $1,250; and
(ii) 25% of the amount deducted or withheld during the year for the acquisition by the employee of approved shares of the capital stock of a prescribed labour-sponsored venture capital corporation.

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

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

Formula 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 − F − F1))] + L
You can round the resulting amount to the nearest multiple of $0.05 or $0.01.

Chapter 6 – Option 2 – Tax formula 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 initialism 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 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.

Formula to calculate annual taxable income (A)

A = Projected annual taxable income
= [S1 × (I − F − F2 − U1)] + B1 − 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. For examples, see the chart below. Also, see the information under "Special situations."

I = Gross pay for the pay period. This includes overtime earned and paid in the same pay period, pension income, qualified pension income, and taxable benefits, plus IYTD, but does not include amounts in factor B.

F = Payroll deductions for the pay period for employee contributions to a registered pension plan for current and past services, a registered retirement savings plan (RRSP), or a retirement compensation arrangement plus FYTD.

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 F2YTD. The legal document could be a garnishment or a similar order of a court or competent tribunal.

U1 = Union dues for the pay period, plus U1YTD.

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 her A.

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 =

A = Projected annual taxable income

K1 = 0.15 × TC

K2 = [(0.15 × (0.0495 × ((S1 × PI) + B1 – $3,500)*, maximum $2,544.30)) +
(0.15 × (0.0188 × ((S1 × IE) + B1), maximum $955.04))]

Only for employees in Quebec:

K2Q = [(0.15 × (0.05325 × ((S1 × PI) + B1 – $3,500)*, maximum $2,737.05)) +
(0.15 × (0.0152 × ((S1 × IE) + B1), maximum $772.16)) +
(0.15 × (0.00548 × S1 × IE) + B1), max $391.82))]

Where:
PI = Pensionable income for the pay period, or the gross income plus any taxable benefits for the pay period, plus PIYTD

IE = Insurable earnings for the pay period including insurable taxable benefits for the pay period, plus IEYTD

The above has to follow the rules in Chapter 7 – "Canada Pension Plan (CPP)" and Chapter 8 – "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; and
(ii) 0.15 × $1,161.

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 Quebec:

T1 = (T3 − LCF)* − (0.165 × T3)
* If the result is negative, enter $0.

Only for 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) $250; and
(ii) 5% of the amount deducted or withheld during the year for the acquisition by the employee of approved shares of the capital stock of a prescribed labour-sponsored venture capital corporation.

Formula to calculate provincial and territorial tax payable (T₂)

We have not repeated the entire explanation for the provincial and territorial variables. Effective January 1, 2016, 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 × PI) + B1 – $3,500)*, maximum $2,544.30)) + (lowest provincial or territorial tax rate × (0.0188 × ((S1 × IE) + B1), maximum $955.04))]
* 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 Quebec:

T2 = $0

Only for outside Canada or in Canada beyond the limits of any province or territory:

T2 = $0

Formula 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
= [S1 × (I − F − F2 − U1)] + B1 + B − HD − F1

Step 2

Projected annual taxable income including B1, but not B payable now
= [S1 × (I − F − F2 − U1)] + B1 − HD − F1

Chapter 7 – Canada Pension Plan (CPP)

Formula to determine CPP contributions for employees receiving salary or wages

C = The lesser of:
(i) $2,544.30* – D; and
(ii) 0.0495** × [PI − ($3,500 ÷ P)].
If the result is negative, C = $0.

* Use $2,737.05 for employees employed in Quebec.
** Use 0.05325 for employees employed in Quebec.

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

C = The lesser of:
(i) $2,544.30* – D; and
(ii) 0.0495** × [G − ($3,500 × N ÷ 365, minimum $67.30)].
If the result is negative, C = $0.

* Use $2,737.05 for employees employed in Quebec.
** Use 0.05325 for employees employed in Quebec.

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.

Employee's CPP basic exemption for various pay periods

Chapter 8 – Employment Insurance (EI)

Formula to calculate EI premiums

The formula below will allow you to determine, in your payroll calculations, the premium payable by an insured person under the Employment Insurance Act. The formula is:

EI = The lesser of:
(i) $955.04 − D1; and
(ii) 0.0188 × IE.

Only for employees in Quebec:

EI = the lesser of
(i) $772.16 − D1; and
(ii) 0.0152 × IE*.

* Round the resulting amount(s) in (ii) to the nearest $0.01.

Chapter 9 – Summary sheets

Summary sheet for January 2016

You can use this sheet as a quick summary for inputting the new figures into your programs.

* Note: Quebec calculates its own amounts, so we do not include figures for that province here.

Summary sheet for January 2015

You can use this sheet as a quick summary for inputting the new figures into your programs.

* Note: Quebec calculates its own amounts. so we do not include figures for that province here.