cra-assistent

← Curriculum /Payroll and source deductions /Level 1

What must be withheld

Draft — unverified

Work through these first

Three deductions come off employment income, and treating them as one thing is the source of most errors in this line. Income tax, Canada Pension Plan contributions and Employment Insurance premiums have different coverage rules, different bases, different exemptions and different employer shares. An amount can be subject to one and not another — earnings can be insurable and not pensionable, or pensionable and not insurable — and the age, employment type and circumstances of the employee change which apply. Every rate and ceiling involved is set annually and published, and none of them is stated in this tutorial. The point here is the structure; the figures come from CRA's tables for the year in question, every time.

How to work through this tutorial

This takes the three deductions one at a time and then puts them together: 1. Understand why the three are not one deduction with three names. 2. Learn income tax withholding and what it is a proxy for. 3. Learn CPP contributions — coverage, the exemption, the ceilings, the employer match. 4. Learn EI premiums — insurable employment, the ceiling, the employer multiple. 5. Understand where the three diverge, and the cases that catch people. 6. Understand why every figure here must be looked up and never recalled. 7. Work through an example separating the three. 8. Check your work against the common errors. 9. Verify every specific against CRA's published guidance before relying on it.

Three deductions, not one

It is tempting to picture a single percentage coming off a pay cheque. Nothing about the system works that way. **Income tax** is withheld as an approximation of the employee's eventual tax liability, and it is reconciled when they file. Too much withheld produces a refund; too little produces a balance owing. It is a payment on account. **CPP contributions** are a contribution to a benefit the employee is building. They are not an approximation of anything, and they are matched by the employer. **EI premiums** are a premium for coverage. They are also employer-matched, but at a multiple of the employee's premium rather than one for one. So the employer's total cost is not the employee's gross pay. It is gross pay plus the employer's CPP and EI shares, and an employer who has budgeted only for the gross has under-budgeted. That is worth saying to a new employer explicitly, because it is a genuine and unwelcome surprise.

Income tax

The employer withholds income tax from each payment of remuneration, federal and provincial or territorial, according to the tables or the formula CRA publishes. How much depends on the amount and the pay period, on the employee's TD1 claim amounts, and on the province or territory of employment — which is the province of the employer's establishment where the employee reports for work, not necessarily where the employee lives. That distinction generates real errors, particularly for remote workers, and it should never be assumed. An employee can ask to have **more** tax withheld, and an employer should honour that. An employee wanting **less** withheld — because of deductions or credits that will reduce their eventual liability — cannot simply be given it by the employer; there is a process for authorising a reduction, and the authorisation comes from CRA rather than from the employer's judgement. The rates, brackets and tables change annually. They are published for each year and for each jurisdiction, and they are looked up, not remembered.

CPP contributions

CPP applies to pensionable employment. Its structure has four moving parts, and every one of them is an annual figure. There is a **basic exemption** — an amount of earnings on which no contribution is made. There is a **maximum amount of pensionable earnings**, above which no further contribution is made at the base rate. There is a **contribution rate** applied to the earnings between those two. And since the enhancement of the plan there is a **second, higher earnings ceiling** with its own rate applied to earnings between the first ceiling and the second. The employer matches the employee's contribution. Coverage has edges worth knowing. There is a minimum age below which employment is not pensionable, and an age at which contributions cease. Between those, an employee who is receiving a CPP retirement pension may be able to elect to stop contributing, on the prescribed form — an election with real consequences that an employer must act on but must not advise about. Quebec operates its own plan rather than the CPP, with its own rates and its own administration. An employer with employees in Quebec is not simply applying different numbers; they are dealing with a different plan and, in part, a different administrator.

EI premiums

EI applies to insurable employment, and its structure is simpler: a **premium rate** applied to insurable earnings up to a **maximum amount of insurable earnings**. Both are annual figures. There is no basic exemption equivalent to the CPP's. The employer pays a share calculated as a multiple of the employee's premium rather than an equal match, and that multiple can be reduced where the employer has a qualifying wage-loss plan — a reduced rate that has to be applied for and maintained. Coverage has its own edges, and they do not line up with the CPP's. Employment of a person by a spouse or common-law partner, or by a corporation they control, is generally not insurable, though a ruling can be requested. Certain other relationships and arrangements are excluded. Quebec again differs, because parental insurance is administered provincially there, which changes the federal premium rate applying to Quebec employees. The practical instruction: never reason from CPP coverage to EI coverage. Check each.

Where the three diverge

Because coverage differs, an amount or a person can be inside one regime and outside another. A young employee below the CPP minimum age may nonetheless be in insurable employment. An employee who has elected to stop CPP contributions continues to pay EI premiums. An employee working for a corporation controlled by their spouse may be pensionable but not insurable. Certain payments — some allowances, some benefits, some kinds of termination payment — are treated differently across the three. An employer who applies one answer to all three will be wrong somewhere, and the error usually surfaces at year end, in a review comparing what was reported against what should have been contributed. That review is a level 3 topic in this line and it exists precisely because these divergences are so easy to get wrong. On a call, the safe move is to treat "is this amount subject to deductions" as three questions and to point at the guidance that answers each.

Why nothing here carries a number

Every rate, exemption and ceiling named above changes annually. They are published by CRA for each year, and for Quebec by Revenu Québec. This tutorial names them and does not state them, and that is deliberate rather than an omission. A figure recalled from a previous year, quoted confidently, produces an incorrect deduction for every pay period until someone catches it — and the employer, who relied on it, carries the consequence. The habit to build: when a payroll question turns on a number, the answer is always "here is where that figure is published for the year you are asking about". Not the figure. There is no situation in this line where reciting one from memory is the right thing to do, including when you are confident, and including when the caller is impatient. CRA publishes the rates and maximums, the deduction tables by jurisdiction and pay period, and an online calculator. All three are the answer; none of them is you.

A worked example: three deductions, three answers

Teaching example. The figures below are invented to show the method. They are not CRA figures, and no amount here should be used for a real taxpayer.

The figures in this example are invented for teaching. They are not real rates, ceilings or exemptions, and nothing here should be quoted as CRA's position or used to check a real calculation. Suppose Yusuf employs his adult daughter Layla in his incorporated bookkeeping business, which he controls. She is paid, say, $3,000 a month. **Income tax** — withheld on the basis of her pay, her TD1 claim amounts and the province of the establishment where she reports for work. There is nothing unusual here; the family relationship is irrelevant to income tax withholding. **CPP** — her employment is pensionable in the ordinary way, assuming she is within the age range. Yusuf's corporation withholds her contribution and pays a matching share. **EI** — this is where the relationship matters. Employment by a corporation controlled by a related person is generally not insurable, so no premium may be due at all. If the corporation withholds premiums anyway, it has withheld something that was not owing, and both it and Layla have paid for coverage she may not have. Suppose Yusuf assumed all three worked the same way and withheld all three. He has one deduction wrong out of three, and it will surface at year end. The lesson: the three deductions have three coverage rules. Answer them separately, every time, and where a family relationship or a controlling interest is in the picture, expect EI to be the one that differs.

Common errors

Treating income tax, CPP and EI as one deduction. They have different coverage, different bases and different employer shares. Reasoning from CPP coverage to EI coverage, or the reverse. Stating any rate, ceiling or exemption from memory. Every one of them changes annually and is published. Using last year's tables. They are published per year for a reason. Assuming the province of employment is where the employee lives. It is the establishment where they report for work. Reducing income tax withholding at the employee's request without the authorisation that requires. Assuming Quebec is the same with different numbers. It is a different pension plan and a different premium structure. Forgetting that the employer's EI share is a multiple of the employee's, not a match. Overlooking that an employer may qualify for a reduced EI rate, which must be applied for. Telling an employer their cost is the employee's gross pay. It is gross pay plus the employer shares. Advising an employee on whether to elect out of CPP contributions. The employer acts on the election; nobody at CRA or in payroll advises on it.

What to verify this tutorial against

This was drafted without a source document, and it names a great many figures without stating any of them. Every one must be taken from CRA's published tables for the relevant year. CRA's payroll deductions tables, published by jurisdiction and pay period, and CRA's payroll deductions online calculator, are the operative references for how much to withhold. CRA's published CPP contribution rates, maximums and exemptions, and EI premium rates and maximums, are the references for every annual figure named here. They are published per year; use the year being asked about. CRA's employers' guide to payroll deductions and remittances is the primary narrative reference for coverage, for pensionable and insurable employment, and for the treatment of particular payments. CRA's guidance on CPP contributions for employees aged 60 to 70, and the prescribed election form for an employee receiving a retirement pension, cover the election described here. Take the form number from the page. CRA's guidance on insurable employment, including employment between related persons and by controlled corporations, is the reference for the EI divergence in the worked example. CRA's guidance on the EI reduced rate for employers with qualifying wage-loss plans covers the reduced multiple. Revenu Québec's publications are the reference for the Quebec Pension Plan and the Quebec parental insurance plan, and for the federal EI rate applying to Quebec employees. CRA's guidance on the province of employment is the reference for the point about where an employee reports for work, which has been revised in recent years — confirm the current position rather than an older one.

Your progress

This is your own record of what you have worked through. It says nothing about whether the content has been verified.

Quiz not attempted. 7 questions available — marking this complete does not require taking it, but the quiz is the only thing here that distinguishes having read the page from having learned it. Take the quiz

Claims to confirm

These are the checkable specifics from this tutorial — the details most likely to be wrong in a drafted page. Confirm each against CRA guidance. 0 of 19 confirmed.

Verify this tutorial

19 claim(s) still unconfirmed. Confirm them above first — verifying the page while its specifics are outstanding would defeat the purpose of listing them.