Payroll Deductions 101 – A Complete Guide by a Montreal CPA Firm Near You

Introduction

Payroll deductions are one of the most important compliance responsibilities for Canadian employers—yet also one of the most misunderstood. Whether you are hiring your first employee, expanding your business, or managing a growing workforce, you must correctly calculate and withhold income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums from employee pay. Mistakes can be extremely costly. CRA holds employers fully responsible for any missed or incorrect deductions, often reassessing multiple years of payroll with interest and penalties. Understanding how payroll deductions work, how to calculate them, and how to remit them properly is essential for every business in Canada.

Legal and Regulatory Framework

Payroll deductions are regulated under several federal statutes:

• Income Tax Act — requires employers to withhold income tax
• Canada Pension Plan Act — requires CPP contributions
• Employment Insurance Act — requires EI premiums
• Excise Tax Act — governs payroll source remittances (administrative rules)
• CRA Payroll Deductions Online Calculator (PDOC) — official method of calculating payroll deductions

To comply, employers must:

1. Register a CRA Payroll Account (RP)
   Required before you pay your first employee.

2. Obtain employee information
   Employees must provide a completed TD1 (federal and provincial) form.

3. Calculate deductions
   Employers must calculate:
   • federal and provincial income tax
   • employee CPP contributions
   • employee EI premiums

4. Add employer contributions
   Employers must remit:
   • CPP employer share (equal to employee portion)
   • EI employer share (1.4 × employee portion)

5. Remit deductions by the deadline
   Usually by the 15th of the following month, or more frequently for large remitters.

6. Report income and deductions
   Employers must prepare T4 slips and a T4 Summary each February.

These rules form the legal foundation for payroll deductions in Canada.

Key Court Decisions

CRA’s strict enforcement of payroll deduction obligations has been upheld repeatedly by the courts.

1. Soper v. Canada

The court ruled that directors are personally liable for unremitted payroll deductions.

2. Hickey v. Canada

A business owner argued that payroll errors were administrative. The court upheld CRA’s penalties, emphasizing payroll deductions as trust funds.

3. Royal Winnipeg Ballet v. Canada

Misclassified dancers meant unpaid CPP and EI contributions; the employer was held responsible.

4. ConCreate USL Ltd. v. Canada

Improper payroll taxes on interprovincial employees resulted in reassessment; the court supported CRA.

These cases reinforce that payroll compliance is mandatory and errors carry significant consequences.

Why CRA Targets This Issue

Payroll deductions are a top enforcement priority because remitted taxes and benefits are considered trust funds—money collected on behalf of the government and employees. CRA audits focus on businesses that:

• remit payroll taxes late
• fail to remit deductions altogether
• miscalculate CPP/EI
• misclassify employees as contractors
• fail to obtain TD1 forms
• under-withhold tax on bonuses or commissions
• provide taxable benefits without including them in payroll
• operate in high-risk industries (construction, hospitality, retail, care services)

CRA also cross-checks payroll filings with T4s, GST/HST filings, and corporate tax returns to identify discrepancies.

Mackisen Strategy

At Mackisen CPA Montreal, we ensure employers process payroll correctly and stay fully compliant. Our payroll strategy includes:

1. Setting Up Payroll Properly

• registering your payroll account
• obtaining and completing TD1 forms
• determining pay frequencies and schedules

2. Calculating Accurate Deductions

• using the CRA PDOC system
• calculating CPP, EI, and tax based on province
• applying rules for bonuses, overtime, vacation pay, and commissions

3. Remitting Payroll Taxes

• preparing monthly or accelerated remittances
• setting up reminders to avoid penalties
• reconciling payments to CRA statements

4. Managing Taxable Benefits

• calculating CPP/EI on benefits
• including benefits in employee income
• preparing accurate year-end T4 slips

5. CRA Audit Protection

• organizing payroll records
• preparing defence packages
• responding to CRA payroll audit letters
• correcting prior-year mistakes through voluntary disclosure

This system ensures accurate, efficient, and fully compliant payroll operations.

Real Client Experience

A small Montreal construction firm missed payroll remittances for several months. CRA assessed thousands in penalties. We helped negotiate a payment arrangement and implemented automated remittances.

A wellness clinic misclassified workers as contractors. CRA reclassified them as employees and reassessed unpaid CPP/EI. We corrected the payroll structure and reduced the reassessment.

A retail business used outdated tax tables and under-withheld tax. CRA intervened. We restructured their payroll system, ensuring compliance going forward.

Common Questions

Business owners often ask whether payroll deductions apply to family employees. Yes—unless specific exemptions apply.

Others ask whether bonuses have special tax rules. Yes—CRA uses lump-sum withholding rates.

Some ask whether CPP/EI apply to part-time employees. Yes—if they meet minimum earnings thresholds.

Another question: Do employers pay EI and CPP too? Yes—employers must contribute both portions.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses manage payroll deductions with accuracy, compliance, and minimal risk. Whether you're hiring your first employee or managing a large workforce, our experts ensure precision and full CRA protection.