Payroll in Canada is a withholding system: the employer calculates the tax and contributions owed on each paycheque, deducts them before the employee is paid, and sends them to the Canada Revenue Agency, with the employer own share of CPP and EI added on top. The employee never handles the deducted money, the employer is legally responsible for deducting and remitting it correctly and on time, and the year-end T4 reconciles the whole year. This guide explains the pieces in the order they are calculated, works the official 2026 Canada Pension Plan figures, and describes remittance and reporting duties. Amounts are in Canadian dollars. Quebec runs the Quebec Pension Plan instead of the CPP, with its own rates and its own parental insurance plan, so the CPP and EI figures here apply outside Quebec, and Quebec payroll needs its own calculation.

The order of deductions on a Canadian paycheque

A Canadian paycheque is built in a fixed order, and the order matters because each deduction is calculated on the pay that remains after the ones before it, or on its own base. Start with gross pay: the salary or wages earned in the pay period, including taxable benefits and taxable allowances. From gross pay, deduct the Canada Pension Plan contribution, then the CPP2 contribution where earnings reach the second tier, then the Employment Insurance premium. Then calculate income tax, federal and provincial or territorial, on the taxable pay, using the annualised payroll method the CRA prescribes. What remains is net pay, the amount deposited to the employee. The employer then adds its own share, matching the CPP and CPP2 contributions and paying 1.4 times the EI premium, and remits the whole amount, employee deductions plus employer share, to the CRA.

The deductions are source deductions, meaning they are withheld at source, from the pay, rather than paid by the employee later. The employer holds the deducted amounts in trust for the government, and the legal duty to deduct, remit, and report falls on the employer, not the employee. An employer that fails to deduct the employee share when it should have cannot simply recover it from the employee later in every case, and the employer share remains due regardless. That allocation of responsibility is why payroll accuracy is treated seriously, and why payroll software and the CRA payroll tables exist: the calculation is prescribed, the tables encode it, and the employer duty is to apply them correctly, period by period, and to reconcile at year end.

Two features of the system surprise people who meet it for the first time. The first is that deductions are calculated per pay period but capped annually: the per-period calculation annualises the pay, applies the annual ceilings, and spreads them across periods, so a steady salary produces steady deductions until a ceiling is reached, and then the deduction stops. The second is that the tax deduction is an estimate, not the final tax: the payroll calculation annualises the current pay and applies the tax tables, but the final tax is settled on the annual return, where total income, total deductions, credits, and other income are combined. A refund or a balance owing at filing time is normal, and it does not mean the payroll calculation was wrong. It means the payroll estimate and the annual reality differed, which they usually do.

CPP and CPP2: the two ceilings for 2026

The Canada Pension Plan contribution for 2026 is calculated on pensionable earnings between two figures: the basic exemption of C$3,500 a year, below which no CPP is payable, and the Year Maximum Pensionable Earnings, YMPE, of C$74,600. Both the employee and the employer contribute 5.95 percent of earnings in that band, and the maximum contribution for each is C$4,230.45, which is 5.95 percent of C$71,100, the band width. Self-employed individuals pay both shares, 11.9 percent, up to C$8,460.90. The basic exemption is spread across pay periods in the payroll calculation: on a biweekly payroll it is C$3,500 divided by 26, which is C$134.62 per period, and CPP is 5.95 percent of the pay above that slice, up to the per-period ceiling.

CPP2 is the second tier of the enhanced CPP, in effect since 2024 and fully phased in for 2026. It applies at 4 percent, from both employee and employer, to earnings between the YMPE of C$74,600 and the Year Additional Maximum Pensionable Earnings, YAMPE, of C$85,000, with no basic exemption on this tier, up to a maximum of C$416.00 each. The band is C$10,400 wide, and 4 percent of it is C$416.00. Self-employed individuals pay 8 percent, up to C$832.00. Earnings above C$85,000 attract no further CPP. The two tiers are separate contributions with separate rates, separate ceilings, and separate maximums, and payroll systems must handle both: a system that applies only the first tier under-deducts every employee earning above C$74,600, and a system that applies the exemption to the second tier under-deducts as well.

Contributions are required for employees aged 18 to 70 who earn more than the basic exemption, with exceptions and elections that the CRA guides describe, including the choice for employees aged 65 to 70 who are already receiving a CPP retirement pension to stop contributing by filing an election. Contributions stop for the year once the annual maximum is reached, which is why an employee on a high salary notices take-home pay rising late in the year: the CPP and CPP2 deductions fall away once the ceilings are passed, and the EI deduction falls away once its maximum is passed. The payroll calculation tracks year-to-date earnings and deductions to enforce the ceilings, and a mid-year job change complicates the picture, because the new employer starts its own year-to-date count, and any over-contribution is reconciled on the tax return.

Official 2026 CPP figures as announced by the CRA. Outside Quebec; Quebec uses the QPP.

Employment Insurance: 1.63 percent to the maximum

Employment Insurance premiums for 2026, outside Quebec, are charged at 1.63 percent of insurable earnings, up to maximum insurable earnings of C$68,900, giving a maximum employee premium of C$1,123.07. Employers pay 1.4 times the employee premium, so the maximum employer premium is C$1,572.30 per employee. There is no per-period exemption for EI, unlike CPP: the premium applies from the first dollar of insurable earnings, and it simply stops for the year once the maximum is reached. Quebec has its own parental insurance plan and a different EI rate, so Quebec payroll must be calculated on Quebec figures, not the ones in this guide.

Most employment is insurable, and most earnings are insurable, with exceptions the CRA and Service Canada guides list, including some forms of self-employment, certain family employment, and employment outside Canada. An employer that operates a registered wage-loss replacement plan or short-term disability plan may qualify for a reduced EI premium rate, and the reduction is reflected in the payroll calculation for covered employees. The premium is a flat percentage, not a graduated one, so the calculation is the simplest on the paycheque: insurable pay times 1.63 percent, capped at the annual maximum, with the employer share at 1.4 times. The complexity in EI is not the rate. It is the determination of what is insurable, and the year-to-date tracking that stops the deduction at the maximum.

Income tax: federal, provincial, and the annualised method

Income tax withholding is calculated by annualising the pay: the payroll method treats the current pay period as if it repeated all year, computes the annual tax on that annualised income using the federal and provincial or territorial tax tables, and divides the result by the number of pay periods. The tables encode the federal and provincial basic personal amounts, the tax brackets, and the credits the employee has claimed on the TD1 forms, federal and provincial, filed at hiring and updated when circumstances change. An employee who claims only the basic personal amount gets the standard withholding. An employee with additional credits, multiple jobs, or other income should file an updated TD1 or request additional withholding, because the standard calculation assumes this job is the only income, and the annual return will otherwise produce a balance owing.

Federal tax and provincial tax are calculated separately and added, because the rates, brackets, and credits differ by province and territory, and the same salary produces different net pay in different provinces. The hub calculator models Ontario tax, and its Ontario example is labelled as such; other provinces need their own tables. The annualised method also handles irregular pay, bonuses, and retroactive pay through prescribed methods that spread or gross up the payment, so that a bonus is not taxed as if the employee earned at the bonus rate all year, and a retroactive payment is taxed on the income it replaces. The details are in the CRA payroll deductions formulas and the payroll tables, and payroll software applies them. The principle to carry away is that withholding is an annual calculation performed one period at a time, and the annual return is where it is settled.

Taxable benefits are part of the picture and are often missed. Benefits the employer provides, such as a company car, group insurance premiums paid by the employer, or a housing benefit, are generally taxable income, and their value is added to gross pay for CPP, EI, and tax purposes as the CRA rules direct, even though no cash changes hands. Non-taxable benefits, such as employer contributions to a registered pension plan within the rules, are treated differently. The distinction matters for every deduction on the cheque, and the CRA guides on taxable benefits, not intuition, decide it. When in doubt, treat a benefit as taxable until the guide says otherwise, because under-withholding is the employer problem, and over-withholding is corrected on the return.

Worked example: the C$85,000 biweekly case

The hub calculator default case is an employee on C$85,000 a year, paid biweekly, in Ontario, and its figures show every deduction in place. Gross pay per period is C$85,000 divided by 26, which is C$3,269.23. CPP per period is 5.95 percent of the pay above the per-period exemption slice, C$3,269.23 minus C$134.62, giving C$186.51. The per-period CPP ceiling is C$74,600 divided by 26, which is C$2,869.23, and the CPP2 ceiling is C$85,000 divided by 26, which is C$3,269.23, so the whole C$400.00 slice above the CPP ceiling sits in the CPP2 band, and CPP2 is 4 percent of C$400.00, which is C$16.00. EI is 1.63 percent of C$3,269.23, which is C$53.29. Federal tax is C$393.33 and Ontario tax is C$213.80 per period, from the annualised calculation on the hub engine. Total deductions are C$862.93, and net pay is C$2,406.30.

Two features of the example are worth noting. First, this employee sits exactly at the CPP2 ceiling, so the whole top slice is CPP2 and none of it escapes contribution: an employee earning more would see the same CPP2 amount, C$16.00 per period, because the ceiling caps it, and an employee earning less than C$74,600 would see no CPP2 at all. Second, the example notes that at this pay, the steady per-period amounts would pass the 2026 annual maximums, CPP C$4,230.45 and EI C$1,123.07, partway through the year, and a real payroll stops those deductions once a maximum is reached, so later cheques in the year are larger. The hub estimate shows the steady per-period figure; a real payroll shows the step up when the ceilings are passed. Both are correct descriptions of the same rules at different points in the year.

A second, simpler example isolates the CPP calculation. An employee earning C$60,000 a year has pensionable earnings of C$60,000 minus C$3,500, which is C$56,500, and the annual CPP contribution is 5.95 percent of C$56,500, which is C$3,361.75 from the employee, matched by the employer. No CPP2 is payable, because C$60,000 is below the YMPE. EI is 1.63 percent of C$60,000, which is C$978.00, below the maximum, matched at 1.4 times by the employer. Income tax depends on the province and the TD1 claims and is not computed here. The example shows the shape: CPP is the large, ceiling-driven deduction, EI is the flat percentage, and tax is the variable that depends on jurisdiction and personal claims.

Remittance: paying the CRA on schedule

Source deductions must be remitted to the CRA, with the employer share, on the schedule the CRA assigns. The CRA assigns each employer a remitter type, based on the average monthly withholding amount, which sets how often remittances are due: monthly for most small employers, more frequently for larger ones, and quarterly for the smallest under the CRA conditions. The remittance is due by the date set for the remitter type, and it is paid through the CRA payroll account, identified by the business number with the RP program account, using the CRA online services, a financial institution, or another CRA-accepted method. Late remittances attract penalties and interest, and the penalties escalate with repeated lateness, which is why remittance dates belong on the payroll calendar alongside pay dates, not after them.

Paying the CRA is a separate step from paying the employee, and it must not be funded from the employee deductions held back: the deducted amounts are held in trust, and the remittance must be made in full and on time, whether or not the business cash flow is comfortable. An employer that deducts and does not remit faces the same penalties as an employer that never deducted, plus the trust liability, and directors of a corporation can be personally liable for unremitted source deductions in the circumstances the law provides. The practical safeguard is procedural: remit on the same cycle as payroll, reconcile the remittance to the payroll register every period, and keep the confirmation for every payment. The CRA My Business Account shows the account balance and the remittance history, and it is the place to check that what was paid matches what was deducted.

New employers must open a payroll account before the first payday, or as soon as an employee is hired, by registering for a business number and a payroll program account with the CRA, and must obtain the employee Social Insurance Number and a completed TD1 form from each employee. Employees must be paid in the manner the employment standards law of the province or territory requires, with a statement of earnings showing gross pay, each deduction, and net pay, on or before each payday. The statement of earnings is not optional paperwork. It is the employee record of the deductions, and it is the document the employee uses to check the T4 at year end.

Year end: T4s, reconciliation, and records

At year end, the employer prepares a T4 slip for each employee, reporting employment income, CPP contributions, CPP2 contributions where applicable, EI premiums, income tax deducted, and the other boxes the slip requires, and files the T4 slips with the CRA together with a T4 Summary, by the last day of February following the calendar year. The employee uses the T4 to file the annual tax return, where the withheld tax is credited, CPP over-contributions from multiple employers are reconciled, and any balance owing or refund is settled. The employer T4 totals must reconcile with the payroll register and with the remittances made during the year: the sum of the T4 boxes must equal the sum of the deductions, and the sum of the remittances must equal the sum of the T4 amounts plus the employer share. A reconciliation difference is an error to be found and corrected, not a rounding difference to be ignored.

Records must be kept for six years from the end of the last tax year to which they relate, under the CRA record-keeping requirement, including payroll registers, remittance confirmations, TD1 forms, T4 copies, and the records supporting any taxable benefit valuation. The records must be kept in a form the CRA can audit, and they must be available at the business address or another CRA-accepted location. Payroll is a system, not a calculation: the per-period arithmetic, the remittance schedule, the year-end reporting, and the record retention are one duty, and a failure in any part of it is a payroll failure, however accurate the individual paycheques were. The calculator estimates the paycheque. The system delivers the compliance.

Frequently asked questions

How does payroll work in Canada?

The employer calculates CPP, CPP2 where applicable, EI, and federal and provincial income tax on each paycheque, deducts them from gross pay, adds the employer share of CPP, CPP2, and EI, and remits the total to the CRA on the assigned schedule. The employee receives net pay and a statement of earnings, and at year end the employer issues a T4 slip reconciling the year. The employer is legally responsible for deducting and remitting correctly.

How is CPP calculated on a paycheck in Canada?

CPP is 5.95 percent of pensionable earnings between the C$3,500 basic exemption and the 2026 YMPE of C$74,600, paid by both the employee and the employer, up to C$4,230.45 each. On a biweekly payroll the exemption is C$134.62 per period. CPP2 adds 4 percent on earnings between C$74,600 and C$85,000, up to C$416.00 each, with no exemption on that tier. Deductions stop once the annual maximums are reached.

Can I pay CRA payroll deductions online?

Yes. Source deductions are remitted through the CRA payroll account, using CRA online services such as My Business Account, or through a financial institution, by the due date for the employer remitter type. Keep the confirmation for every remittance and reconcile it to the payroll register each period. Late remittances attract penalties and interest.

What is the difference between CPP and CPP2?

CPP is the original tier, at 5.95 percent on earnings between the C$3,500 exemption and the C$74,600 ceiling. CPP2 is the second tier of the CPP enhancement, at 4 percent on earnings between C$74,600 and the C$85,000 second ceiling, with no exemption. Both are paid by the employee and matched by the employer. Earnings above C$85,000 attract no further CPP.

Does an employer have to pay CPP and EI too?

Yes. The employer matches the employee CPP and CPP2 contributions dollar for dollar, and pays 1.4 times the employee EI premium. For 2026 the maximum employer CPP contribution is C$4,230.45, the maximum employer CPP2 contribution is C$416.00, and the maximum employer EI premium is C$1,572.30. The employer share is remitted to the CRA together with the employee deductions.

When are T4 slips due in Canada?

T4 slips and the T4 Summary must be filed with the CRA by the last day of February following the calendar year, and copies given to employees by the same date. The T4 reports employment income, CPP and CPP2 contributions, EI premiums, and income tax deducted for the year. Payroll records supporting the T4s must be kept for six years from the end of the last tax year to which they relate.