By law, an employer must deduct the following amounts from your employment earnings:
- Income tax
- Employee contributions to Employment Insurance (EI)
- Employee contributions to the Canada Pension Plan (CPP)
These deductions mean that the amount on your paycheque will be less than the total 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.
Depending on how you get paid, your pay stub will either be attached to your cheque or to a direct deposit statement. This sample pay stub illustrates the following common terms:
- Gross pay – Your “gross” pay is 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.
- Net pay – Your “net” or “take home” pay is your gross pay, less all amounts deducted and remitted to CRA on your behalf by your employer.
In Canada, we pay income tax at graduated rates. This means that the tax rate goes up as your income goes up. The table below shows the federal tax rates that apply in 2016. In addition to federal tax, you must also pay provincial tax, which varies by province.
In December 2015, a Notice of Ways and Means Motion introduced a “middle class tax cut” and a new tax bracket for high-income earners. Specifically, it reduced the second personal tax rate from 22% to 20.5%, and also introduced a new top tax rate of 33% on taxable income over $200,000, for 2016 and subsequent tax years.
|Income level||The tax rate that applies (2016)|
|$1 to $45,282||15 per cent|
|$45,283 to $90,563||20.5 per cent|
|$90,564 to $140,388||26 per cent|
|$140,389 to $200,000||29 per cent|
|Over $200,000||33 per cent|
The basic personal amount
Because of a tax credit called the basic personal amount, you do not pay federal income tax on the first $11,474 of taxable income you earn in 2016.
Canada Pension Plan (CPP) and Employment Insurance (EI)
These programs are run by the federal government and participation is mandatory. You may benefit in the future by receiving payments from these programs. For example, EI protects workers who become unemployed by paying out benefits to those who apply and qualify. If you retire after age 60, the CPP pays benefits to seniors 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:
Participation in these programs will reduce your net take-home pay if you opt-in to contribute or they are required.
The 2016 maximum annual federal employee contributions are:
- EI: $955.04
- CPP: $2,544.30