How to Calculate Canadian Payroll

Canadian payroll is less complicated than you might think.

As with any payroll, calculating a Canadian payroll properly requires some trial-and-error and focus before understanding how the mechanics of the calculations work. Every province and territory within Canada follow the same rules when determining gross earnings. Statutory or source deduction calculations varies slightly in each province with the exception of Quebec. Quebec merits more of a challenge as they have more deductions than the rest of Canada.

Things You'll Need

• Calculator
• Canadian federal tax tables
• Canadian provincial tax tables
• Canada Payroll Association guidelines
• Payroll Deductions Online Calculator

Instructions

Gross Taxable Income

1. 

   Count every penny as they can come into play.

   Calculate an employee's gross payable income. This includes everything an employee should actually receive before any deductions.

   For hourly employees, multiply their hours for the pay period by their hourly rate. For salaried employees, take their gross salary figure for the pay period. For commissioned employees, make note of the amount. For bonuses, tips paid, or other paid out amounts, mark that down.

   Total all of these figures that apply and mark it as "Gross Payable Income." Set this number aside as you'll need it later.

2. 

   Even if the company pays for this, it's a taxable benefit.

   Determine the amount of taxable benefits. Taxable benefits reflect those earnings whereby a company covers something on an employee's behalf. This could be something like car allowances that aren't paid directly to the employee, or company portions retirement plan contributions. If you are uncertain if something is considered a taxable benefit or not, contact either the Canada Revenue Agency (CRA) or the Canadian Payroll Association (if you're authorized through them) for clarification. Total these and set this figure aside as "Taxable Benefits."

3. 

   If you owe an employee back money for something, don't tax it.

   Figure the amount of earnings are non-taxable. These earnings fall under the categories of reimbursements or other miscellaneous items that would be the same as if you were paying the employee straight cash that would not have any deductions connected to it. Mark these off as "Non-Taxable Earnings."

4. 

   All simple addition so far

   Add together the gross payable income and the taxable benefits. This new amount becomes the employees "Gross Taxable Income." This will be your main figure for most of your deduction calculations.

Source Deductions

1. 

   Canada Pension pays into an employee's retirement.

   Calculate Canada Pension Plan (CPP) deductions.

   Canadian payrolls organize deductions in order of importance to the government. The order as follows: Canada Pension Plan (CPP), Employment Insurance (EI), Retirement Plan/Union Dues, Federal Tax, Provincial Tax, Quebec Parental Insurance Plan (for Quebec only).

   For CPP, each employee receives a CPP basic exemption which changes from year to year. Take this exemption and subtract it from the employee's gross taxable income. The remainder becomes the amount subject to CPP. Multiply this remainder by the current CPP rate. The total gives you the employee's CPP deduction amount. Set this aside.

   Also note, the Canada Revenue Agency sets rates and yearly maximum employee CPP contribution amounts. Check with them to be certain you are not over-calculating for an employee.

2. 

   EI allows an employee to claim insurance in case they leave employment for reasons such as maternity leave.

   Work out the employee's Employment Insurance (EI). Employment Insurance excludes certain earnings depending on the employee's position in the company. Also, the federal government provides different EI calculation rates for Quebec employees. Please consult Service Canada before calculating these amounts. Earnings that become subject to EI are considered "Insurable Earnings."

   To calculate EI, take the total gross taxable earnings and subtract any earnings that are not considered Insurable Earnings. Multiply this result by the current EI rate. This becomes the EI deduction. Set this aside.

   Please note, the Canada Revenue Agency (CRA) sets yearly maximum employee contribution amounts and rates for EI. Check with them every year to be aware of the amount.

3. 

   Save more money for retirement by contributing to RRSPs on a pay.

   Take note of all Registered Retirement Savings Plan (RRSP) and union dues, if it applies. Subtract any of these amounts from the employee's gross taxable income. Set this amount aside and call it "Gross Taxable Income minus RRSP" or something similar.

   This new figure will be what needs to be used for the remaining calculations.

   Federal and provincial laws exempt RRSPs and union dues from federal and provincial tax deductions.

4. 

   Tax calculation can be easier to understand than the definition.

   Calculate federal income tax. The federal government allows a basic federal tax exemption for every employee in Canada. These amounts can change yearly. Consult the Canada Revenue Agency (CRA) to note these amounts.

   An employee may complete a TD1 form from the CRA to give to a company to increase the amount of the exemption. If no TD1 is completed, the employee's tax exemption defaults to the basic amount.

   Take this exemption and deduct it from the "gross taxable income minus RRSPs" (or whatever you had named it). Note this new figure.

   Pull out the Federal tax tables found online through the CRA website and find this new figure in the tables. The amount shown in the tables beside this new figure becomes the "Federal Tax Deduction." Jot this amount down somewhere.

5. 

   If you have a headache, we're almost done.

   Work out the Provincial Tax deduction. As with the federal tax deduction, an employee receives a tax exemption on the provincial level. These amounts can change yearly so check with the CRA before going forward.

   An employee may complete a provincial TD1 form (designated TD1 followed by the provincial abbreviation) to increase his provincial exemption amount.

   Use this exemption and deduct it from the "gross taxable income minus RRSPs." Mark this new figure down.

   Check the provincial tax tables found online through the CRA website and note the "Provincial Tax Deduction" amount beside the new figure.

6. 

   Montreal, Quebec pays more deductions than the rest of Canada.

   Calculate the Quebec Parental Insurance Plan (QPIP) contribution for Quebec employees only. The Quebec government requires all Quebec employees to contribute to QPIP with no exceptions. Quebec sets a maximum contribution amount and rate yearly. Please consult the Ministere du Revenu Quebec (MRQ) for these amounts before calculating.

   Take the same amount you had set aside for "Insurable Earnings." Multiply the "Insurable Earnings" by the current set rate. This result becomes your QPIP deduction.

7. 

   This is the home stretch.

   Add all of your deductions together (CPP, EI, Federal tax and Provincial tax).

   This total becomes your Source Deductions.

   Subtract all of these Source Deductions from the employee's gross payable income. Do not confuse this with the gross taxable income as it could be different.

8. 

   The rest goes into the employee's piggie bank.

   Deduct all remaining deductions. This could mean company-related amounts such as uniforms, or gym memberships.

   Add to this the amount of "Non-Taxable Earnings."

   The result becomes the employee's Net Pay.

Employer Tax Contributions

1. 

   Employee and company CPP amounts mirror each other.

   Determine the company's CPP contributions.

   You're done with your employee's pay but the Canada Revenue Agency (CRA) requires all companies to contribute to CPP, EI and QPIP as well. This amount must come from the employer and can not be deducted from the employee.

   Company portions of CPP match dollar for dollar to the employee's CPP portion. This amount must be remitted to the CRA.

2. 

   They're only numbers.

   Multiply employee's EI deduction by 1.4 to get the company's portion.

   The company remits this amount to the CRA.

3. 

   Feels good to finish!

   Take the employee's QPIP (if there is a Quebec employee) and multiply this by the current employer's QPIP rate to get the the company's portion.

   This rate can change yearly. Please investigate through the Ministere Revenu du Quebec MRQ for an accurate number.

   The company remits QPIP to the Minitere du Revenue Quebec (MRQ).

   And you're done.

Tips & Warnings

• The Canada Revenue Agency (CRA) offers a Payroll Deductions Online Calculator (PDOC) to do all of those steps for you through their website.

• The Ministere du Revenu Quebec (MRQ) offers a Quebec online deductions calculator called WinRAS for Quebec employees.

• Numerous payroll companies offer services to run and calculate an employer's payroll to save time.

• If an employer miscalculates an employee's deductions and remits the incorrect amounts, the company becomes liable to repay those amounts.

References

• Canada Revenue Agency: Business Payroll
• Canadian Payroll Association
• Revenu Quebec: Businesses
• HRinfodesk.com: Canadian Payroll and Employement Law

Resources

• Canada Revenue Agency: Payroll Deductions Online Calculator
• Revenu Quebec: WinRAS Calculator