Chapter
3

Source deductions

11
min read

What is a source deduction?

Source deductions refers to the portion of pay you’re legally required to withhold from your employees’ paychecks and remit to the Canada Revenue Agency on their behalf. They’re made up of Canada Pension Plan contributions, Employment Insurance premiums, income tax, taxable benefits and optional additional tax deductions.

Before diving into your calculations, you’ll need to determine if your employees are exempt from one or more of the deductions based on the type of payments they’ll receive. Let’s take a look at statutory and other deductions.

Statutory (or legislated) deductions

Canada Pension Plan (CPP) contributions

The CPP is part of Canada’s retirement income system. At 65, or the age of retirement, eligible employees, receive a retirement pension that is based on how much they’ve contributed to, and how long they’ve been an employee. Basic benefits are also provided to your employees in the case of disability, or death. In the case of death, benefits are provided to an employee’s survivors.

Rememeber:

  • As the employer, you must deduct CPP contributions if an employee is between the ages of 18 to 69, in pensionable employment and aren’t considered to be disabled under the CPP or Quebec Pensions Plan (QPP).¹ The amount to be deducted is based on the employee’s income.
  • Any of your employees from the ages of 65 and 69 can elect to stop contributing to the CPP. This method for an employee is different than someone self-employed or both.

Feeling stuck? Check out this link for a full breakdown of how to calculate CPP contributions.

Are you in Quebec? Quebec employers have to deduct contributions for the Quebec Pensions Plan instead of the CPP.

Employment Insurance (EI) premium

Employment insurance provides employees with temporary financial assistance while unemployed and looking for work. Financial assistance is also provided in the case of sickness, pregnancy, caring for a newborn or adopted child, and/or caring for a sick family member.

Federal and provincial income tax

Income tax refers to the annual tax imposed by the government directly on personal and business income. This amount deducted is based on your employee’s total claim amount on their Form TD1. As the employer, you’ll have to submit your employees claims for both federal and provincial taxes. To help, we’ve listed both Canadian federal and provincial tax rates for 2019.

NOTE: Canada's federal tax system is progressive. The more you make, the more taxes you’ll receive.

Federal tax rates for 2019²

  • 15% on the 1st $47,630 of taxable income, plus
  • 20.5% on the next $47,629 of taxable income, plus
  • 26% on the next $52,408 of taxable income, plus
  • 29% on the next $62,704 of taxable income, plus
  • 33% of taxable income over $210,371

Provincial tax rates for 2019³

  • 5.05% on the 1st $43,906 of taxable income, plus
  • 9.15% on the next $43,907, plus
  • 11.16% on the next $62,187, plus
  • 12.16% on the next $70,000, plus
  • 13.16 % on the amount over $220,000

To review a specific provincial tax rate, please visit the Government of Canada’s website.

Employer contributions

Now let’s not forget about you - your employer contributions. You’re also obligated to contribute to the CPP and EI. As the employer, you’ll need to make CPP contributions and pay the EI premiums for each of your employees and deduct CPP contributions and EI premiums from the amounts paid to your employees and remit this to the Canada Revenue Agency.⁴ Depending on the jurisdiction, additional taxes may be applied to the employer as well.

Keep in mind that most businesses or industries have to follow employment standards under provincial or territorial employment standards legislation; however, some businesses or industries are federally regulated.⁵

Are you in Quebec? Quebec employers are obligated to contribute to the Quebec Pension Plan (QPP) and the Quebec Pension Plan (QPP).