Get ready to make deductions

Background

After you have determined that you are an employer, a trustee or a payer of other amounts and have opened a payroll account , you have to calculate the CPP contributions, EI premiums, and income tax to deduct from amounts you pay your employees.

You also have to calculate your share of CPP contributions and EI premiums.

What to consider when calculating source deductions and contributions

When you calculate source deductions and contributions, you have to consider all of the following:

The employee's situation
Your situation as an employer or a payer
The type of employment held by the employee
The type of payment made
The province of employment

Your responsibilities

Every amount you deduct or withhold or collect as an employer or a payer is deemed to be held in trust for the government until you remit the amount to the government in the manner and at the time prescribed by income tax law. Such amounts constitute a separate fund that is not part of your property.

Deductions to withhold from your employees' pay

Canada Pension Plan (CPP)

Learn about when to deduct CPP contributions, including when to start, stop or restart deducting them: About the deduction of CPP contributions
Find information about current and past CPP contribution rates, maximum contributions, maximum annual pensionable earnings and exemption amounts (annual and per pay period): CPP contribution rates, maximums and exemptions
New – 2024 Find information about Second additional CPP contribution (CPP2) rates, maximum contributions and additional maximum annual pensionable earnings (annual and per pay period): Second additional CPP contribution (CPP2) rates and maximums

Employment Insurance (EI)

Learn about when to start and stop deducting EI premiums: About the deduction of EI premiums
Find information about current and past EI premium rates, maximum annual premiums and annual insurable earnings: EI premium rates and maximums

Income tax

Learn about when to deduct federal, provincial and territorial income tax: About the deduction of income tax
Find information about current and past federal, provincial and territorial income tax rates and income thresholds (tax brackets): Income tax rates and income thresholds

What if you made an error in calculating deductions

You may realize that you have overdeducted or underdeducted, EI, CPP or income tax. As soon as you know that the required amount was not deducted, you should notify your employee.

To correct a deduction error or a salary overpayment:

If you have not filed the information return, refer to: Make corrections before filing
If you already filed the information return, refer to: Make corrections after filing

What if you do not withhold deductions

The CRA will apply a penalty and charge interest.

Penalty

A penalty is assessed when the required CPP, EI, and income tax were not deducted. The penalty is:

10% of the amounts that were not deducted
20% of the amounts that were not deducted for a second or additional failures in a calendar year, if they were made knowingly or under circumstances of gross negligence

Interest

If you do not pay an amount that is due, the CRA may apply interest from the day the payment was due.

The CRA sets the interest rate for every calendar quarter, based on prescribed interest rates
The interest is compounded daily
The CRA applies interest to late payment of assessed penalties

The interest rates are announced in the month preceding each calendar quarter.

Summary convictions

If you do not comply with the deducting, remitting, and reporting requirements, you may be prosecuted. You could be fined from $1,000 to $25,000, or you could be fined and imprisoned for a term of up to 12 months.

Director’s liability

If a corporation (including for-profit or non-profit) does not deduct, remit, or pay amounts held in trust for the Receiver General (CPP, EI, and income tax), the directors of the corporation at the time of the failure are jointly and severally, or solidarily, liable along with the corporation, to pay the amount due. This amount includes penalties and interest.

However, if the directors take action to ensure the corporation makes the necessary deductions or remittances, CRA will not hold the directors personally responsible. For more information, see Information Circular IC89-2R3, Directors’ Liability.

References

Legislation

ITA: 153(1): Requirement to deduct and remit
ITA: 161(11)(c): Interest on penalties
ITA: 227(8)(a): Failure to deduct – 10% penalty
ITA: 227(8)(b): Failure to deduct – 20% penalty (gross negligence)
ITA: 227(8.3): Interest on amounts not deducted or withheld
ITA: 238(1): Prosecution
ITA: 248(11): Compound interest
ITR: 4301: Prescribed rate of interest
CPP: 21(1): Requirement to deduct and remit
CPP: 21(2): CPP liability for failure to deduct and remit
CPP: 21(6): Failure to remit – Interest
CPP: 21(7)(a): Failure to remit – 10% penalty
CPP: 21(7)(b): Failure to remit – 20% penalty (gross negligence)
CPP: 22(1): Minister may assess amount payable
EIA: 82(1): Requirement to deduct and remit
EIA: 82(4): EI liability for failure to deduct and remit
EIA: 82(8): Failure to remit – Interest
EIA: 82(9)(a): Failure to remit – 10% penalty
EIA: 82(9)(b): Failure to remit – 20% penalty (gross negligence)
EIA: 85(1): Assessment

Page details

2024-04-10

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