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Methods of calculating deductions – CPP, EI, and income tax

CPP and EI

Income tax

You can use our Payroll Deductions Online Calculator (PDOC) to calculate payroll deductions for all provinces and territories except Quebec. It calculates payroll deductions for the most common pay periods (such as weekly or biweekly), based on exact salary figures.

The Payroll Deductions Tables help you calculate the Canada Pension Plan (CPP) contributions, employment insurance (EI) premiums, and the amount of federal, provincial (except Quebec), and territorial income tax that you have to deduct from amounts you pay each pay period.

Note

A pay period means the period for which you pay earnings or other remuneration to an employee.

Before you decide which method to use, read Which provincial or territorial tax tables should you use?.

There are numerous versions of the Payroll Deductions Tables to help you calculate CPP contributions, EI premiums, and the amount of federal, provincial (except Quebec), and territorial income tax that you have to deduct.

Note

If the computer formulas you want to use are different from ours, you have to submit them to any tax service office or tax centre for approval.

CPP and EI

You can use the manual calculation for CPP and the manual calculation for EI to calculate the deductions.

Important notice

The Department of Finance Canada has implemented legislation that will change the CPP. There will be a gradual 7 year phase in beginning in 2019. For more information, go to their website.

Caution for employers using software programs, in-house payroll programs, and bookkeeping methods

For Canada Pension Plan (CPP) purposes, contributions are not calculated from the first dollar of pensionable earnings. Instead, they are calculated using the amount of pensionable earnings minus a basic exemption amount that is based on the period of employment.

If used improperly, some payroll software programs, in-house payroll programs, and bookkeeping methods can calculate unwarranted or incorrect refunds of CPP contributions for both employees and employers. The improper calculations treat all employment as if it were full-year employment, which incorrectly reduces both the employee’s and employer’s contributions.

For example, when a part-year employee does not qualify for the full annual exemption, a program may indicate that the employer should report a CPP overdeduction in box 22 – Income tax deducted of the T4 slip. This may result in an unwarranted refund of tax to the employee when the employee files his or her income tax and benefit return.

When employees receive refunds for CPP overdeductions, their pensionable service is adversely affected. This could affect their CPP income when they retire. In addition, employers who report such overdeductions receive a credit they are not entitled to because the employee worked for them for less than 12 months.

Income tax

As an employer or payer, you are responsible for deducting income tax from the remuneration or other income you pay. There is no age limit for deducting income tax and there is no employer contribution required.

We have forms to help you determine how much income tax to deduct: 

  • Most employees and recipients fill out Form TD1. There are two types of form TD1 – federal and provincial or territorial. Both forms, once completed, are used to determine the amount of federal and provincial or territorial tax to deduct from the income an individual receives in a year.
  • Employees who are paid commissions and who claim expenses may choose to fill out Form TD1X, in addition to Form TD1.
  • Fishers fill out Form TD3F.

As an employer, you may create a federal and/or provincial or territorial Form TD1 and have your employee send it to you electronically rather than send you the actual completed Form TD1. For more information, go to Electronic Form TD1.

Once completed, the TD1 will provide the employees’ or the recipients’ total claim amount. Use this amount to determine the claim code to use to determine the amount of tax to deduct. Claim codes are listed in each version of the payroll deductions tables.

You can use the manual calculation for income tax to calculate the deductions.

Also, if you pay bonuses and retroactive pay increases, or you pay employees who earn commissions (without expenses) periodically, use the bonus method.

If an employee states that his or her total expected income from all sources will be less than the total amount claimed, do not deduct any federal, provincial, or territorial tax. However, if you know this statement is false, you have to deduct tax on the amounts you pay. If you need advice, call 1-800-959-5525.

Employment in Quebec

Individuals who work or receive other income (such as pension income) in the province of Quebec have to fill out a federal Form TD1, Personal Tax Credits Return, and a provincial Form TP-1015.3-V, Source Deductions Return.

Individuals who incur expenses related to earning commissions have to fill out a federal Form TD1X, Statement of Commission Income and Expenses for Payroll Tax Deductions, and provincial Form TP-1015.R.13.1-V, Statement of Commissions and Expenses for Source Deduction Purposes.

You can get Quebec forms from Revenu Québec.

Online calculators

Forms and publications

Related topics

Original Source: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/methods-calculating-deductions-cpp-ei-income-tax.html