Payroll Deductions: Tax, Benefits, and Garnishments

A comprehensive breakdown of what gets deducted from paycheques, why, and how to calculate each deduction correctly for different provinces.

14 min read Advanced February 2026

Payroll specialist reviewing deduction calculations on computer screen with tax forms and calculator visible

Understanding Payroll Deductions

When you look at your paycheque, it’s rarely the full amount you earned. That’s because payroll deductions take a slice — sometimes a pretty big slice — before you see the money. There’s income tax, Canada Pension Plan contributions, Employment Insurance premiums, and potentially health benefits, dental plans, or court-ordered garnishments. We’re going to walk through exactly what comes out, why it comes out, and how to calculate each deduction correctly.

Employers handle these deductions with legal responsibility. Get it wrong and you’re looking at penalties from CRA, unhappy employees, and a lot of paperwork to fix it. Get it right and everything runs smoothly — payroll flows, tax remittances are accurate, and employees understand their paycheques.

Desk setup showing Canadian tax forms, calculator, and payroll documents neatly organized

The Main Types of Deductions

Every paycheque has two categories of deductions: mandatory statutory deductions and voluntary deductions. Statutory ones — income tax, CPP, EI — aren’t optional. Your employees don’t get to skip them. Voluntary deductions are different. They’re benefits the employee chose, like a pension plan, health insurance, or union dues.

Federal Income Tax

Calculated using federal tax brackets. Varies by province because provinces have their own tax rates on top of federal.

CPP Contributions

Employees contribute up to the maximum pensionable earnings limit. For 2026, that’s 5.95% of insurable earnings between $3,500 and $68,500.

EI Premiums

Deducted from employee paycheques. Rates vary by province — Ontario is different from Alberta, which is different from BC.

Provincial Tax

Each province has its own tax rates and brackets. Combined with federal tax, this is the biggest deduction for most employees.

Income Tax: Federal and Provincial

Income tax is progressive — meaning the more you earn, the higher percentage you pay. It’s not that the entire income gets taxed at a higher rate, though. Only the income in each bracket gets taxed at that bracket’s rate. This is where a lot of people get confused.

Let’s say someone earns $55,000 in Ontario for 2026. You don’t just apply the tax rate for $55,000 earners to the whole amount. Instead, you calculate tax on the portion that falls in each bracket. The first chunk is taxed at the lowest rate, then the next chunk at the next rate, and so on. Federal and provincial taxes stack on top of each other.

Most employers use payroll software or CRA’s withholding tax tables to calculate this automatically. You can also use the federal and provincial TD1 forms your employees fill out. These forms tell you their personal amounts — which reduces their tax. More dependents, more deductions on the TD1, less tax withheld from the paycheque.

Tax bracket table showing progressive tax rates for different income levels with color-coded sections

CPP and EI: Canada’s Social Safety Net

CPP and EI are different beasts. CPP is a pension program — employees contribute now so they get retirement income later. EI is insurance — it covers temporary income loss from unemployment, maternity, sickness, or compassionate care. Both have maximum contribution limits, which is why you don’t deduct these percentages on unlimited earnings.

For CPP in 2026, the employee contribution rate is 5.95% on earnings between $3,500 (the basic exemption) and $68,500 (the maximum pensionable earnings). That means for someone earning $70,000, you only calculate CPP on $68,500 — the extra $1,500 doesn’t get CPP deducted. EI has similar limits but different numbers. In most provinces, the 2026 employee rate is around 1.56% to 1.66% depending on where the employee works.

One more thing: employees don’t pay CPP if they’re under 18 or over 70. And if someone is already collecting CPP retirement benefits, they might not contribute anymore. Always check individual circumstances.

Person reviewing CPP and EI deduction statements with pension plan documents spread on desk

Voluntary Deductions and Benefits

Beyond the mandatory stuff, there’s a whole world of voluntary deductions. Health and dental insurance, group life insurance, pension contributions, union dues, charitable donations — these come out of paycheques too, but only because the employee agreed to it. You need written authorization for each one. Without it, you can’t deduct.

Voluntary deductions come in two flavors: pre-tax and post-tax. Pre-tax deductions reduce the employee’s taxable income — think registered pension plan contributions or certain health spending accounts. Post-tax deductions don’t reduce taxable income but the employee still gets the benefit. Always clarify with your benefits provider which is which. It affects the tax calculation.

There’s also garnishments — court-ordered deductions for child support, spousal support, or debt collection. These are different because they’re legally mandated but not “voluntary” in the normal sense. Once you receive a garnishment order, you must deduct and remit to the court. You don’t have discretion.

Benefits package documents showing health insurance, dental, and pension plan options with enrollment forms

How to Calculate Deductions Correctly

The order matters. You calculate deductions in a specific sequence to get the right numbers:

Start with Gross Earnings

This is total pay before anything comes out. Include salary, hourly wages, bonuses, overtime — everything the employee earned.

Deduct Pre-Tax Items

Registered pension plan contributions, health spending accounts, union dues. These reduce taxable income, so you deduct them first.

Calculate Income Tax

Use the adjusted gross (after pre-tax deductions) with federal and provincial brackets. Apply the TD1 personal amounts.

Calculate CPP and EI

Apply the contribution rates to the gross earnings (or adjusted earnings, depending on the deduction). Remember the maximum limits.

Deduct Post-Tax Items

Benefits, union dues (if post-tax), garnishments, charitable donations. These come out after all tax calculations.

Calculate Net Pay

Subtract all deductions from gross earnings. This is what the employee actually receives. Double-check your math — one error cascades through everything.

Pro tip: Different provinces have different rules for what counts as insurable earnings for CPP and EI. Some benefits are excluded, some aren’t. Always check provincial guidelines — what works in Ontario might be wrong in British Columbia.

Provincial Variations That Matter

Canada doesn’t have one-size-fits-all payroll rules. Each province sets its own income tax brackets, EI rates, and rules for what counts as insurable earnings. This is why payroll software has province-specific settings — because Ontario’s rules aren’t Alberta’s rules.

EI rates are a good example. In 2026, the employee rate in Ontario is around 1.58%, but Quebec is different because Quebec runs its own parental insurance program. BC, Alberta, and the Atlantic provinces each have their own rates. Get this wrong and you’re remitting the wrong amount to Service Canada.

Income tax brackets shift too. Someone earning $55,000 pays different combined federal-provincial tax in Toronto versus Calgary. The brackets are different, the rates are different. You need current tables for each province where you have employees.

Canada map with different provinces highlighted showing varying tax rates and deduction percentages for each region

Common Payroll Deduction Mistakes

Wrong CPP Calculation Base

Some employers calculate CPP on gross earnings including benefits. That’s incorrect. CPP is calculated on specific types of earnings only. Bonuses count, benefits usually don’t. Check your calculation base.

Ignoring Maximum Contribution Limits

You can’t deduct CPP or EI beyond the maximum. Once an employee hits the limit (usually mid-year for high earners), you stop deducting for the rest of the year. Forgetting this means over-deducting and having to refund the employee.

Mixing Up Pre-Tax and Post-Tax Deductions

Deducting benefits before calculating tax when they should be after-tax changes the tax amount. The employee gets over-taxed or under-taxed. Always confirm the order with your benefits provider.

Not Updating Tax Brackets and Rates

Tax brackets change every year. If you’re using 2025 brackets in 2026, your calculations are wrong. Keep payroll tables current. Most software updates automatically, but manual calculations need attention.

Remitting Deductions to the CRA

Calculating deductions is one part. Remitting them to the Canada Revenue Agency is the other. You collect income tax, CPP, and EI from employees, then you owe that money to the government. It’s not your money to keep.

The remittance schedule depends on your payroll frequency and how much you owe. Most employers remit monthly. Some larger employers remit more frequently. You’re given a remittance due date — usually 15 days after the month ends. Miss it and you’re paying penalties plus interest. The CRA doesn’t accept late payments kindly.

You’ll also file a year-end T4 slip for each employee showing all deductions taken during the year. This reconciles what you deducted versus what the employee claimed. If there’s a discrepancy, it shows up during tax time. Keep meticulous records.

CRA remittance schedule and calendar showing payment deadlines for income tax and CPP/EI remittance

Tools and Resources for Accurate Deductions

You don’t have to calculate everything by hand. In fact, you shouldn’t. Here’s what helps:

CRA Payroll Deduction Online Calculator

Free tool from the CRA that calculates federal and provincial tax, CPP, and EI. You enter gross earnings and it spits out deductions. Not for final payroll processing, but great for checking your numbers.

Payroll Software (ADP, Guidepoint, Wagepoint)

Professional payroll software handles all calculations automatically, tracks deductions across the year, calculates maximum limits, and generates remittance reports. Worth the investment if you have more than a handful of employees.

CRA Tax Tables and Guides

Published annually, these show federal and provincial tax brackets, rates, and basic personal amounts. You need the current year’s tables. Available free from CRA’s website.

TD1 Forms (Personal Tax Credits)

Employees complete these to claim personal tax credits. This reduces their tax deduction. Keep copies on file and update them when circumstances change.

Getting Payroll Deductions Right

Payroll deductions are complex, but they don’t have to be overwhelming. The key is understanding the order of operations, knowing your provincial rules, and using reliable tools. Whether you’re calculating manually or using software, accuracy matters. One wrong deduction cascades through tax filings and employee trust.

Start with current tax tables and rates. Confirm which deductions are pre-tax and which are post-tax. Remember the maximum limits for CPP and EI. Keep records. When in doubt, check the CRA website or contact a payroll professional. Getting it right saves headaches, penalties, and keeps your employees satisfied.

Need help with specific deduction scenarios? Read our related guides on CPP contributions and T4 slip preparation.

Important Disclaimer

This article provides educational information about payroll deductions in Canada. It’s not legal or tax advice. Payroll rules change frequently, and provincial variations exist. Always verify current rates, brackets, and regulations with the Canada Revenue Agency before making payroll decisions. For complex situations or multi-province operations, consult a payroll professional or accountant. Individual circumstances vary, and what applies in one situation might not apply in another. Your responsibility as an employer is to stay informed and compliant with current regulations.