How Canada Payroll Deductions Work: CPP, EI, and Income Tax

Federal income tax is the largest deduction on most Canadian paychecks. Canada uses a graduated bracket system, meaning different portions of your income are taxed at different rates. For 2025, the federal brackets are: 14.5% on the first $57,375 of taxable income, 20.5% on income from $57,375 to $114,750, 26% on income from $114,750 to $158,468, 29% on income from $158,468 to $226,382, and 33% on income above $226,382.

The federal basic personal amount (BPA) for 2025 is $16,129. This means the first $16,129 of income is effectively not taxed at the federal level because the BPA generates a non-refundable tax credit at the lowest bracket rate. Your employer uses CRA payroll tables to estimate how much federal tax to withhold from each paycheck based on your pay frequency and annual income.

In addition to federal tax, every province and territory levies its own income tax using its own bracket structure. Provincial rates vary significantly. Alberta has a relatively simple structure starting at 10%, while provinces like Nova Scotia and Newfoundland have higher top rates. Ontario uses rates from 5.05% to 13.16% across five brackets, plus a surtax at higher income levels.

Each province also has its own basic personal amount, which works similarly to the federal BPA. The combination of your federal and provincial marginal rates determines your combined marginal tax rate, which is the rate on your next dollar of income. This combined rate is what matters most for tax planning decisions like RRSP contributions.

The Canada Pension Plan (CPP) is a mandatory retirement savings program. In 2025, employees contribute 5.95% of their pensionable earnings between the basic exemption of $3,500 and the yearly maximum pensionable earnings (YMPE) of $71,300. This means the maximum annual employee CPP contribution is $4,034.10.

Your employer matches your CPP contribution, so the total going into CPP on your behalf is double what you see on your pay stub. CPP contributions stop once you reach the annual maximum, so higher earners may notice their paychecks increase slightly in the later months of the year when CPP is fully paid. Quebec uses the Quebec Pension Plan (QPP) instead of CPP, with slightly different rates.

Employment Insurance (EI) premiums fund the federal employment insurance program that provides temporary income if you lose your job. In 2025, the employee EI premium rate is 1.64% of insurable earnings up to a maximum of $65,700, making the maximum annual employee premium $1,077.48.

Quebec employees pay a lower EI rate of 1.31% because Quebec operates its own parental insurance plan (QPIP), which is funded separately. Like CPP, EI premiums stop once you hit the annual maximum insurable earnings. Your employer pays 1.4 times your EI premium as their share.

Registered Retirement Savings Plan (RRSP) contributions are one of the most effective ways to reduce your payroll tax burden. When you contribute to an RRSP, the amount is deducted from your taxable income before federal and provincial tax are calculated. This means you save tax at your marginal rate.

For example, if your combined marginal tax rate is 30% and you contribute $10,000 to your RRSP, you reduce your tax by approximately $3,000. If your employer deducts RRSP contributions directly from your paycheck, they can reduce the tax withheld on each pay, giving you the benefit immediately rather than waiting for a tax refund. The 2025 RRSP contribution limit is 18% of your previous year's earned income, up to a maximum of $32,490.