Understanding the tax deductions on your pay stub

Your pay stub summarizes employment earningsEarnings For companies, it’s the money they make and share with their shareholders. For investors, it’s the money they make from their investments.+ read full definition and other amounts deducted for income taxIncome tax A charge you pay based on your total income from all sources. The Canadian government and your province set the rate.+ read full definition, EI and CPP.

Depending on how you get paid, your pay stub may be a paper slip or a digital record. Your pay stub will either be attached to your cheque or to a direct depositDirect deposit A way to have money from your pay, investments or the government put into your account without a cheque. Example: You can ask the Canada Revenue Agency to deposit your tax refund directly into your bank account rather than mailing you a cheque.+ read full definition statement. It will show the difference between the amount of money you earn, and the amount of money you actually take home.

A pay stub will include:

1. Gross pay – the amount you make every week, every month or every hour before your employer deducts any income taxes, payroll taxes (EI and CPP) or other items.
2. Net payNet pay Your “net” or “take home” pay is your gross pay, less all amounts deducted by your employer, such as taxes and retirement contributions.+ read full definition (or take-home pay) – the amount you have after deductions are made from your gross pay.

Required deductions

By law, an employer must deduct the following amounts from your employment earnings:

• Income taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition
• Employee contributions to Employment Insurance (EI)Employment insurance (EI) A government plan that helps unemployed Canadians while they look for work or upgrade their skills. EI may also help Canadians who are sick, pregnant or caring for a newborn or adopted child, as well as those who must care for a family member who is seriously ill.+ read full definition
• Employee contributions to the Canada PensionPension A steady income you get after you retire. Some pensions pay you a fixed amount for life. Others save up money for you while you are working. You use that money to create income after you retire.+ read full definition Plan (CPP)

These deductions mean that the amount on your paycheque will be less than the total income you earned. Your employer must withhold and remit these amounts directly to the Canada Revenue Agency (CRA). However, you do get credit for having paid these amounts, which are reported on your T4, when you file your annual tax return. These amounts can be claimed as deductions.

Income tax

Canada has a graduated personal income tax system. Everyone pays the same tax rateTax rate The rate at which you or a business pays tax on income. Often stated as a percentage, such as 25%.+ read full definition up to a certain level of income. Each additional dollar earned is taxed at a higher income tax bracketTax bracket The rate at which you pay tax, based on your income level.+ read full definition, and each bracket has an income threshold. There are currently five federal income tax brackets.

The table below shows the federal tax rates that apply in 2022. In addition to federal tax, you must also pay provincial tax, which varies by province.

Because of the marginal tax rates, if your level of income is at a higher level, your whole income will not be taxed at that rate. For example, if you earn $98,000, the first $50,000 will be taxed at 15%, and the rest at 20.5%.

THE BASIC PERSONAL AMOUNT

You do not pay federal income tax on the first $15,000 of your taxable incomeTaxable income The amount of income you have to pay tax on, after tax credits and deductions.+ read full definition in 2023 because of a tax creditTax credit The amount you can deduct from your income when you file your taxes. This lowers the tax that you owe.+ read full definition called the basic personal amount. If you have a net income above $235,675 your basic personal amount will be lower. See the CRA website for more information.

Canada Pension Plan and Employment Insurance

These programs are run by the federal government and participation is mandatory. You may benefitBenefit Money, goods, or services that you get from your workplace or from a government program such as the Canada Pension Plan.+ read full definition in the future by receiving payments from these programs.

• Employment Insurance (EI) – provides temporary income support to unemployed workers while they look for employment or upgrade their skills. It also provides benefits to workers who take time off due to specific life events such as pregnancy or illness.
• Canada Pension Plan (CPP) is a retirement pension that pays a monthly benefit to those who qualify.

In addition to the amounts that are deducted and withheld from your pay, your employer also makes contributions to EI and CPP on your behalf. The amount depends on how much you contribute.

Additional payroll deductions

Finally, your employer may deduct additional items from your pay. For example, you may choose to participate in your company’s:

• pension plan
• group insuranceGroup insurance Insurance for a group, such as people who work for the same company, or belong to the same union or other association. Often costs less than insurance that you buy on your own, but not always.+ read full definition plan
• RRSPRRSP See Registered Retirement Savings Plan.+ read full definition savings plan

Participation in these programs will reduce your net take-home pay if you opt-in to contribute or if they are required. However, these payments will contribute to your insurance or retirement savings which you can draw on in later years.

Learn more information about EI rates and maximums, and CPP contribution rates, maximums and exemptions from the Canada Revenue Agency.