You hired your first employee, ran the first pay, and now the Canada Revenue Agency expects a slice of every paycheque, on a schedule, with penalties attached. This guide covers what you must withhold, how the amounts are calculated, when the money is due, and what goes wrong when employers fall behind.
Key Takeaways
- Every paycheque carries three withholdings: income tax, Canada Pension Plan contributions, and Employment Insurance premiums.
- You contribute on top of what you withhold: matching pension contributions dollar for dollar and paying 1.4 times the EI premium.
- Your remittance schedule depends on your average monthly withholding amount; most small employers pay monthly by the 15th.
- Late remittances are penalized on a ladder: 3%, 5%, 7%, then 10%, and 20% for a repeat failure in the same year.
- Withheld amounts are trust money, not working capital. CRA can pursue directors personally for shortfalls.
What Are Payroll Source Deductions?
Payroll source deductions are the amounts an employer takes off an employee’s gross pay before the money ever reaches them. Under s. 153(1) of the Income Tax Act (ITA), you must withhold three things from most employment income: federal and provincial income tax, the employee’s pension contribution, and the employee’s EI premium.
The system exists so tax is collected at the source rather than waiting for each employee to pay it in April. Your role as employer is collector and trustee. The money you deduct never belongs to your business: you hold it briefly, then remit it with your own employer share.
CRA’s T4001 Employers’ Guide is the authoritative rulebook on payroll deductions and contributions, and everything below follows it.
Setting Up Payroll as a New Employer
Before your first pay run, you need a payroll program account, an RP account added to your existing business number. Registration takes minutes through CRA’s Business Registration Online. If you incorporated recently, the business number from incorporating in Ontario is the same one your RP account attaches to.
Next, every new hire completes federal and provincial TD1 forms. These declare the personal credits that determine how much income tax you withhold. An employee claiming only the basic personal amount has more tax withheld than one claiming spousal or caregiver credits, so keep the forms on file and update them when circumstances change.
As a brand-new employer, you’re usually classified as a regular remitter by default. Your first remittance is due by the 15th of the month after your first payday, a deadline that surprises many owners who assume the clock starts at year-end.
How to Calculate Payroll Deduction Amounts
You have two practical options. The Payroll Deductions Online Calculator (PDOC) computes each paycheque’s withholdings from gross pay, province, pay frequency, and TD1 claims. Alternatively, CRA’s T4032 payroll deduction tables give the same figures in printed form. Most software builds the online calculator’s logic in, but you remain responsible for the output either way.
The 2026 figures that drive the math:
| Component | Rate (employee) | 2026 earnings ceiling | Employee maximum |
|---|---|---|---|
| Base pension contribution | 5.95% | $74,600 (less $3,500 exemption) | $4,230.45 |
| Second additional contribution (CPP2) | 4.00% | $74,600 to $85,000 | $416.00 |
| EI premium | 1.63% | $68,900 insurable earnings | $1,123.07 |
| Income tax | Graduated | No ceiling | Per TD1 and tables |
CPP2, the second additional Canada Pension Plan contribution, applies only to earnings between the first ceiling and the higher $85,000 ceiling. Once an employee’s pay crosses both maximums during the year, those withholdings stop and take-home pay rises for the remaining periods.
Quebec runs its own parallel system through Revenu Québec, with QPP contributions and a separate provincial withholding return. Everything else here describes Canadian payroll in the CRA-administered provinces; provincial income tax is collected through the same federal remittance everywhere except Quebec.
What You Withhold and What You Contribute
Withholding is only half the cost. For every dollar of pension contribution you withhold, you contribute another dollar from the business. For EI, your share is 1.4 times the employee premium, a rate CRA confirmed for 2026 at $2.28 per $100 of insurable earnings against the employee’s $1.63.
Example: Priya, $80,000 salary in 2026. Her base pension withholding maxes out at $4,230.45. CPP2 adds 4% of the $5,400 between the ceilings: $216. Her EI premium caps at $1,123.07 because her pay exceeds the $68,900 insurable maximum. Your employer cost on top of her salary: $4,230.45 + $216 matched, plus $1,572.30 of employer EI, about $6,019 before any provincial payroll tax. Budgeting salary without the employer share is the single most common new-employer cash-flow error we see.
Ontario employers may also owe Employer Health Tax (EHT), a provincial payroll tax of up to 1.95% on Ontario remuneration. Eligible private-sector employers deduct a $1 million exemption before any EHT applies, so most small businesses pay nothing, but associated companies share one exemption, a detail that catches growing corporate groups.
Remittance Due Dates for Each Remitter Type
Your deadline depends on your average monthly withholding amount (AMWA): roughly, total annual withholdings divided by the months you paid staff. CRA assigns the remitter type; for payroll remittances, the due-date rules work out as follows:
| Remitter type | AMWA | Deadline |
|---|---|---|
| Quarterly | Under $1,000 (new) or under $3,000 with a clean record | Apr 15, Jul 15, Oct 15, Jan 15 |
| Regular | Under $25,000 | 15th of the following month |
| Accelerated, threshold 1 | $25,000–$99,999.99 | 25th (paydays 1st–15th) and 10th of next month (paydays 16th–end) |
| Accelerated, threshold 2 | $100,000+ | Within 3 working days of each pay period |
Each source deductions remittance goes in with your PD7A statement of account reference. Pay electronically or at a financial institution; a mailed cheque that arrives late is still late. Furthermore, months with payroll but no remittance received are exactly what flags an account for review, so if you had no employees in a period, file a nil remittance rather than staying silent.
What Happens When You Remit Payroll Late
Late remittances are penalized on a ladder set out in the T4001 guide:
| Days late | Penalty on the amount due |
|---|---|
| 1–3 days | 3% |
| 4–5 days | 5% |
| 6–7 days | 7% |
| 8+ days, or not remitted | 10% |
| Second failure in the same year (knowingly or through gross negligence) | 20% |
Arrears interest compounds daily on top. The math bites quickly: a regular remitter who sends an $8,000 remittance nine days late owes an $800 penalty, and $1,600 if it happens again that year with the higher rate applied.
The deeper risk is what the money legally is. Withheld deductions are deemed held in trust for the Crown, which is why unremitted source deductions survive most creditor arrangements and why CRA collects them more aggressively than ordinary interest and penalty balances. Under ITA s. 227.1, directors are personally liable for unremitted amounts, and CRA can assess a director up to two years after resignation.
In our CRA representation practice, unremitted source deductions are the debt CRA pursues hardest. We’ve seen trust examinations open with one comparison: total remittances posted against the T4 Summary. A gap between those two numbers, not the lateness of any single payment, is what our CRA representation files most often trace back to. For the growing employers we work with in Vaughan and across the GTA, our Vaughan accounting team treats that reconciliation as a monthly habit, not a February scramble.
T4 Slips and the Year-End Payroll Process
The withholding year closes with T4 slips, due to CRA and to each employee by the last day of February following the calendar year. Before filing, reconcile the T4 Summary against your twelve PD7A remittances, because any shortfall is visible to CRA the moment the return lands. The filing deadline, the late-filing penalty scale, PIER reviews, and the T4 versus T4A boundary are covered in our guide to T4 slip deadlines and penalties.
If you pay yourself a salary from your own corporation, the same machinery applies to you, and year-end is when the salary-versus-dividend question resurfaces. Our guide to eligible and non-eligible dividends covers the other side of that decision, and our corporate tax advisory work is where the two threads meet.
Common Mistakes
- Spending withheld amounts as working capital. It is trust money; a slow month doesn’t defer the deadline.
- Missing the very first remittance because no one told you the 15th-of-next-month clock started with payday one.
- Skipping nil remittances in months without payroll, which reads as a missing payment to CRA’s systems.
- Ignoring TD1 updates, so withholding drifts from reality and employees face April balances they blame on you.
- Forgetting CPP2 on salaries above the first ceiling: the second contribution band still trips payroll run manually.
- Treating contractors as staff without analysis. If CRA recharacterizes a contractor as an employee, the unwithheld amounts land on the employer. Our self-employment tax forms guide explains the paperwork on the other side of that line.
- Missing the EHT association rule: related companies sharing one $1 million exemption, not one each.
Action Checklist
- Register the RP payroll account before the first payday.
- Collect federal and provincial TD1 forms from every hire.
- Run each pay through the PDOC or current deduction tables.
- Diarize your remittance deadline: the 15th for most small employers.
- Remit electronically, keep the PD7A confirmations, and keep payroll bookkeeping current so AMWA reconciles.
- File nil remittances for no-payroll months.
- Reconcile remittances to the T4 Summary before the end-of-February filing.
- Review AMWA each January; your remitter type can change as payroll grows.
- Book a year-end compensation review if you pay yourself a salary.
Frequently Asked Questions
What is an example of a payroll deduction?
Income tax withheld from a paycheque is the most common example. A $5,000 monthly salary in Ontario also carries pension and EI withholdings, so the employee’s deposit might be roughly $3,800 while the difference is remitted to CRA on their behalf.
What are the mandatory payroll deductions for employees?
Three are mandatory across Canada: federal and provincial income tax, Canada Pension Plan contributions (Quebec Pension Plan in Quebec), and EI premiums. Anything else, such as benefits premiums, union dues, and garnishments, is situational and sits on top of the mandatory three.
How do I calculate payroll deductions?
Use CRA’s Payroll Deductions Online Calculator, which applies the current rates, ceilings, and TD1 credits to each pay. The calculation is only as good as its inputs, so confirm province of employment, pay frequency, and TD1 claims first.
How do TD1 forms affect what I withhold?
TD1 forms set the personal credit amounts that reduce income tax withholding. Higher claimed credits mean less tax withheld each pay. Employees complete one federal and one provincial form at hire and again whenever their credits change.
Do I remit anything in a month with no payroll?
Yes: file a nil remittance for the period. It costs nothing and tells CRA the silence is intentional, which prevents the automated follow-up a missing payment triggers.
Can directors be personally liable for unremitted source deductions?
Yes. ITA s. 227.1 makes directors jointly liable for amounts a corporation withheld but never remitted, unless they exercised due diligence. CRA can assess a director for up to two years after they leave the board.
Are bonuses subject to source deductions?
Yes. Bonuses are employment income, so tax, pension, and EI withholdings all apply, often using the bonus method, which annualizes the payment so withholding doesn’t overshoot. Year-end bonuses are also a remittance-timing trap: the deduction clock runs from when the bonus is paid, not when it’s declared.
The Bottom Line
- Withhold tax, pension contributions, and EI from every paycheque, and budget your matching share on top.
- Know your remitter type and its deadline; the 15th of the following month covers most small employers.
- The penalty ladder is fast and the trust-debt rules are unforgiving: directors carry personal exposure.
- Reconcile remittances to the T4 Summary before February’s filing deadline.
Payroll rules are mechanical, but the situations that break them rarely are: growth, a missed month, a contractor who was really an employee. If any of those variables sound familiar, a CPA review will surface what a calculator can’t. Contact us to talk it through.
