How to Do Payroll Deductions in Canada
As a responsible business owner and employer, you have to make sure that your employees are getting paid what they deserve while remaining compliant to Canadian laws.
As a responsible business owner and employer, you have to make sure that your employees are getting paid what they deserve while remaining compliant to Canadian laws. There are a number of regulations in place (depending on province or territory) regarding employee pay, which means that salaries are calculated differently depending on location
One of the main causes of these differences is the payroll deductions. Different territories or provinces may have different deduction categories or may calculate the same deductions differently. This is why it is important that you know how to do payroll deductions in Canada.
What You Need
- Your books
- Pay slips
- Statements of earnings
- The payroll deduction online calculator (PDOC)
The link in the bulleted list already contains all you need to calculate payroll deductions. However, you will only get accurate amounts if you input the exact figures. This is why you need to have your books handy as well. In addition, you are advised to create your own statements of earnings.
#1 Know which deductions to take out.
You have to know how to determine how much you need to deduct from your employees’ pay for their Canada Pension Plan (CPP) contributions, employee insurance (EI) premiums, and income tax.
You have to determine your share as well, and then withhold these amounts in an account separate from the one you initially opened for your business, in trust for the Receiver General.
Not all payments require the abovementioned deductions, though. The government of Canada has a complete list of payments here. You can go over the links to see whether a certain payment is eligible for such deductions or not.
#2 Use the payroll deduction online calculator (PDOC)
The PDOC can be accessed through this link and can be used for your employees’ salaries, commission, pension, and verification of CPP contributions and EI premiums. To remain secure, do not forget to clear your browser’s cache and exit it after using the calculator. This is to make sure that your information, which is retained for up to 30 minutes of inactivity, does not get accessed by other people. You also want to make complete statements of earnings.
#3 Be updated about any policy changes
The smallest policy change can and will affect your calculations. Always check if your province or territory has implemented any change to payroll-related policies to make sure that you are paying your employees correctly.
#4 Know some useful formulas
There are numerous formulas you can get your hands on and easily key into Microsoft Excel or any similar software to produce the right numbers. To illustrate an example, let us show you this formula below for the annual basic provincial or territorial tax (T2) for Prince Edward Island.
T2 = T4 + V1
where T4 = (V x A) – KP – K1P – K2P – K3P,
where V and KP are based on the annual taxable income (A).
If negative, T2 = $0.
V = annual provincial or territorial tax rate for the year (except Quebec)
V1 = provincial or territorial surtax (only for Prince Edward Island and Ontario)
KP = provincial or territorial constant
K1P = non-refundable personal tax credit
K2P = CPP contributions and EI premium tax credits for the year
K3P = other credits, such as medical expenses and donations
The government of Canada has a page dedicated solely to computer formulas for payroll deductions. On that website, you will notice that the T2 formula is different from what is showing here. That is because we removed variables in the original formula that do not apply to Prince Edward Island.
These are more or less the basics of how to do payroll deductions in Canada. Although the Canadian government’s website and affordable commercially available software can pretty much do payroll deductions for you (and can definitely do them faster!), you have to know the basics so that you can tell if anything is off.