Canadian Payroll Deductions

1. Canada Revenue Agency (CRA) Deductions

The main deductions from CRA are for Employment Insurance, Canada Pension Plan (or Quebec Pension Plan in Quebec), and income taxes. Here's what they're all about:

Employment Insurance (EI)
Until the mid-1990s, EI was known as UI (Unemployment Insurance). At that time, the government changed the name and made it harder for people to collect benefits. Essentially, EI is a safety net for people who lose their jobs due to a shortage of work. Here are the basic rules regarding EI:

• You can collect EI benefits only if you've paid into EI through your earnings. Currently, your employer deducts 1.98% of your pay as EI premiums, up to a maximum of $711.00 a year. In addition, your employer contributes 2.422% of your pay, up to a maximum of $995.44 a year, to EI. Therefore, up to $1,706.47 can be paid into EI each year in your name.
• You can get EI only if you were laid off due to a shortage of work. You can't collect if you quit your job or were fired for poor performance.
• To collect, you have to have worked a minimum number of hours during the previous year. The number ranges from 420 to 910 hours (about 11 to 24 weeks of full-time work), depending on the province/territory and the unemployment rate in your specific region of the province/territory.
• EI pays you 55% of your regular earnings from your last job, up to a maximum of $435 per week. The number of weeks you can receive EI also depends on the unemployment rate in your region and also the number of weeks you worked. That maximum ranges between 14 and 45 weeks. After your EI runs out, you have to either find a job or apply for social assistance. You also can apply for EI to cover the cost of returning to school.
• The government expects you to actively look for work while collecting EI benefits. If you don't, you may lose your EI benefits. Therefore, you might be asked to show your EI officer at the local Human Resources and Skills Development Canada (HRSDC) office which employers you've applied to and what you've been doing to find a job.

The EI fund also pays out a number of other benefits to people who have paid into the system and temporarily cannot work. These people receive the same money as those on regular EI. Here's how it works:

• First, there is so-called maternity or parental leave. It can be paid for up to 50 weeks per pregnancy. Women who have worked at least 600 insured hours in the previous year can receive benefits for 15 weeks immediately before or after childbirth. For the remaining 35 weeks, the mother can continue to collect EI or she can share those weeks with the other parent.
• If you can't work due to a long-term sickness or injury, EI will pay you benefits for up to 15 weeks. You must have worked at least 600 hours in the previous year.
• If an immediate family member is terminally ill and at risk of dying within 26 weeks, your company may allow you to take time off work to care for your relative under EI's Compassionate Care program. You'll receive EI benefits for six weeks as long as you've worked at least 600 hours in the past year. So far, government agencies are the main employers that participate in the program, which has been running since January 2004.

Canada Pension Plan (CPP) (or in Quebec, the Quebec Pension Plan, or QPP)
You also pay money to the Canada Pension Plan to provide you with a retirement fund. Here's how it works:

• Your employer deducts 4.95% of your salary for CPP contributions. Your employer also contributes an equal amount on your behalf. The maximum that can be deducted in a year from you is $2,049.30. Employers face the same maximum contribution, for a total annual premium of up to $4,098.60 paid in your name.
• You can begin collecting your CPP pension at age 60, but your benefits will be lower than what you would receive if you wait until you turn 65.
• The amount you receive is based on how much you paid in. The current maximum monthly pension is $884.58 while the average pensioner receives $448.73.
• CPP also pays a pension to people who have a long-term disability that prevents them from working.

(While it's too early to talk about retirement, you'll also want to know that the government pays everyone, regardless of income, a second pension called Old Age Security when people turn 65. The maximum benefit is currently $505.83 a month.

Income tax
Both your province (or territory) and the federal government charge income taxes. Each province sets its own rates while the federal rate ranges from 15% to 29%.

Here is a summary of federal tax rates:

• You pay 15% on the first $37,178 of taxable income.
• You pay 22% on the next $37,178 of taxable income.
• You pay 26% on the next $46,531 of taxable income.
• You pay 29% on any taxable income over $120,887.

If you made that $60,000 starting salary, here's how your basic federal tax will be calculated:

• $5,577 on your first $37178
• plus $5,020.84 on your next $22,822
• minus $1,440 is basic non-deductible tax credit, a direct reduction of the tax payable,
• minus $408 tax credit for CPP and EI contributions made
• so your total federal tax would be $8,749.84.

The provinces/territories have their own tax brackets and tax rates. In Ontario, taxes range from 6.05% to 11.16%. Here is an example of how much provincial income tax you would pay if you lived in Ontario based on the $60,000 salary:

• $2,147 on your first $35,488
• plus $2,242.85 on your next $24,512
• minus $517.45 in basic tax exemptions
• minus $114.58 tax credit for CPP and EI contributions made
• so your total provincial tax would be $3,757.82.

A person making $60,000 living in Ontario, therefore, would pay a maximum of $12,507.66 in income tax to the federal and provincial governments. Once you add in CPP ($2,049.30) and EI premiums ($711.00), your total government deductions would reach $15,267.96.

You may pay less than this amount, though, once you factor in tax reductions. Besides the basic tax exemption in 2007 (in other words, the federal government doesn't tax your first $9,600 of your taxable income), there are many other reductions you may be eligible for such as credits for childcare and dependants, post-secondary tuition, and interest you pay on your student loans.

2. Other Possible Deductions From Your Pay

Benefits
Your pay stub might also include deductions for "benefits." If your employer provides coverage for healthcare such as prescription drugs or eye care (which are not covered by your provincial health plan), you will pay part of the benefit premiums on your paycheque. Your benefits might also cover dental care and long-term disability leave. In most cases, your benefit plan pays part of your costs for drugs and dental care. So, if you go to the dentist, the plan might pay 80% of the cost while you pay the other 20%. The other coverage your employer might provide is workers' compensation, which provides you with income if you get injured on the job. It is the employer that pays into the fund, not you. And it is usually only workplaces that involve any danger that pay into workers' compensation.

Union Dues
Another deduction you might see on your paycheque is union dues. If you're part of a union, you have to pay them. They are tax-deductible, as are memberships for official associations, e.g., provincial colleges of nurses.

3. RRSPs and Retirement Funds

The other big thing people talk about is RRSPs. RRSP is an acronym for Registered Retirement Savings Plan. RRSPs are not a deduction from your pay, but they are an important factor to think about when you start working. The advantage of RRSPs is that they allow you to start saving for your retirement while also allowing you to reduce your taxes. Here's how it works:

• You can contribute up to 18% of your last year’s earned income into an RRSP, with a maximum contribution of $20,000 in 2008.
• If you made $60,000 this year and invested the maximum, $10,800, in an RRSP, your taxable income is reduced by that amount. The $10,800 is deferred to be taxed at withdrawal or retirement, whichever is earlier.
• When you file your tax return, the government doesn't charge you tax on that $10,800 invested in an RRSP. Essentially, they consider you to have made $49,200 instead of $60,000, giving you a savings of $2,376 in federal income tax. Your provincial income tax will also be reduced. You get a nice tax-refund cheque.

Instead, you'll pay the tax when you withdraw money from the RRSP. Since most people earn higher incomes while they're working, they pay a higher tax rate, but when they retire, they tend to have lower incomes and, therefore, will pay less tax on the RRSP money they withdraw when they retire. You can also take out your RRSP in a year when your income is reduced. If you lose your job, for example, you can take out your RRSP and still pay little or no tax since your income has dropped.

The government also lets you use up your RRSP to make a down payment on a first house or pay college or university tuition fees without paying tax on the amount you withdraw. The former, the Home Buyers' Plan (HBP) allows you to withdraw a maximum of $20,000, which must be paid back within 15 years, otherwise you will be taxed on the outstanding amount at the end of the 15 years. The latter, the Lifelong Learning Plan (LLP), allows you to withdraw from your RRSP up to $10,000 a year to a maximum of $20,000 over a four-year period. In most cases you must be entering a full-time program. You have 10 years to repay the amount borrowed, otherwise you will be taxed on the outstanding amount at the end of the 10 years. (The LLP plan is eligible for a spouse's education but not children's.)

To claim an RRSP tax reduction, you have to buy it by March 1 of each year (e.g., for the RRSP deduction to be claimed on your 2007 tax return, you must make the contribution before March 1, 2008). In most cases, you'll go to a financial institution such as a bank or an investment broker to set one up. There are all sorts of RRSP funds you can invest in, including stocks, mutual funds, GICs (Guaranteed Investment Certificates), government bonds, and savings accounts.

As noted, there are limits on how much you can put into an RRSP while still avoiding the tax. But if you don't have enough money to contribute up to your limit, the government allows you to claim what you don't use in future years. If your limit is $10,800, for example, and you only put in $3,000, the extra $7,800 is added to your contribution limit for later years.

If you're not able to save enough money to buy a lump-sum RRSP by March 1, there are two options. First, you can ask your bank to take an automatic monthly deduction out of your account to go into an RRSP. Or, many banks will allow you to take out a loan to buy an RRSP. (Assuming that the interest you earn from the retirement fund and the tax reduction you get will outweigh the interest you pay on the loan. For example, if you borrow $10,800 and have to pay $500 a year in interest, you'll still be ahead if you pay back the loan in four years given that your RRSP will have saved you over $3,000 in tax).

Besides RRSPs, you also might get a pension through your employer. Often, you're expected to pay into the retirement fund through a deduction off your paycheque. In some cases, the company invests the money in an RRSP in your name. Your contribution might be, for example, 2% off your regular paycheque, which your employer matches. At the end of the year, the amount you and your employer put into the RRSP will count against your annual RRSP limit.

It is important to note that many deductions will change each year, including EI, CPP, and taxes, which are subject to governments' annual budgets. While it may be disappointing to find your paycheque is lower than expected, you do get lots of benefits from your deductions even though you might not see them until well into the future.

Note: The above rates are based on the 2007-2008 rates released by the Canada Revenue Agency.