Income Tax Withholding

Definition

Income tax withholding is tax deducted when an employer pays taxable remuneration. The employer pays the employee the net amount and remits the deductions separately by its assigned payroll deadline. It does not have to send the tax to CRA before paying the employee. CRA income-tax deduction rules

Regular pay

Use the CRA tables, Payroll Deductions Online Calculator (PDOC), or payroll software implementing the applicable T4127 formulas. Select the employee's province of employment, pay frequency and TD1 claim amounts. Qualifying pension or RRSP contributions withheld at source, enhanced CPP deductions and other permitted adjustments can affect the calculation; a simple gross-pay-times-tax-rate formula is incomplete. CRA calculation methods

The province of employment is determined under CRA's establishment rules. It is not automatically the employee's residence. For a full-time remote-work agreement, assess whether the employee is reasonably attached to an employer establishment. If no reporting or attachment rule applies, the establishment from which the remuneration is paid can matter. Quebec has separate provincial payroll administration. CRA province-of-employment rules

An employee seeking a reduction for deductions not already allowed at source may need CRA authorization, commonly through T1213. Keep the authorization and follow its terms. An employee can ask for additional income-tax withholding on TD1. Neither process changes the final tax determined on the personal return.

Bonuses, overtime and vacation pay

Bonuses and other irregular payments have their own calculation. Conceptually, compare annual tax with and without the payment; do not multiply an annual-tax difference by the number of pay periods again. CRA's step-by-step method also accounts for earlier irregular payments and applicable deductions. Bonus and irregular-payment treatment

The payment's circumstances matter: overtime paid in the period earned can follow regular-pay treatment, whereas accumulated overtime paid later and vacation pay paid when no vacation is taken can use the irregular-payment method. Do not classify all overtime or vacation pay alike. Follow the relevant option in CRA's income-tax calculation instructions.

Example

A BC employee earns $5,000 every two weeks over 26 pays and contributes $250 each pay to a qualifying group RRSP through payroll. Before the other required payroll adjustments, the annualized amount is ($5,000 − $250) × 26 = $123,500.

Enter the actual pay date, province of employment, TD1 totals and RRSP deduction in the current payroll calculation. The final withholding also reflects the applicable credits and CPP adjustments. This annualized amount alone is not a complete tax calculation. Add employee CPP and EI where applicable, then pay the net wages; remit employee deductions plus employer contributions by the employer's remitter deadline.

Common mistakes

• Using an outdated table when rates change at the start of a year or during it.
• Using residence alone to determine payroll province.
• Deducting tax only at year-end from wages already paid.
• Treating a shareholder's salary as exempt from ordinary withholding.
• Ignoring a valid CRA letter authorizing reduced withholding.

Related concepts

• TD1 Form
• CPP Contributions
• EI Premiums
• PD7A Remittance Voucher
• T4 Slips