Running payroll in Canada means more than cutting cheques. Every time you pay an employee, you are legally required to withhold specific amounts from their gross pay and send those funds — plus your own matching contributions — to the Canada Revenue Agency. These withholdings are called payroll source deductions, and getting them wrong can expose you personally to significant financial liability. Here is everything Canadian employers need to know about CRA payroll source deductions in 2025.
Source deductions are amounts you deduct directly from an employee's gross pay before issuing their paycheque. The CRA requires employers to withhold three categories of deductions on behalf of their employees:
Beyond withholding the employee's share, you as the employer must also contribute your own matching amounts for CPP and EI on top of the employee deductions. These employer contributions come entirely out of your business funds — they are not deducted from the employee's pay. The combined amount (employee deductions plus employer contributions) must be remitted to the CRA by the applicable deadline.
For 2025, CPP contributions apply on earnings between the Year's Basic Exemption of $3,500 and the Year's Maximum Pensionable Earnings (YMPE) of $71,300. The contribution rate is 5.95% for both the employee and the employer on earnings within this range.
Canada also introduced a second earnings ceiling under the CPP2 enhancement. Earnings between $71,300 and the Year's Additional Maximum Pensionable Earnings of $81,900 are subject to an additional CPP2 rate of 4% for both the employee and employer. If your employees earn above the first ceiling, you need to calculate and remit both CPP and CPP2 contributions.
For 2025, employees pay EI premiums at a rate of 1.64% on insurable earnings up to the annual maximum insurable earnings of $65,700. The maximum annual employee premium is therefore $1,077.48.
Employers pay 1.4 times the employee premium, which works out to a rate of 2.296% on the same insurable earnings. This means for every dollar of EI your employee contributes, you owe an additional $1.40. If you offer an approved employer-sponsored short-term disability plan, you may qualify for a reduced employer EI rate — contact the CRA to apply.
Income tax withholding does not have a single flat rate. The amount you withhold depends on the employee's annualised income, their province or territory of employment, and the personal tax credits they have claimed. Federal tax brackets in 2025 range from 15% on the first $57,375 of taxable income up to 33% on income exceeding $253,414. Alberta provincial rates apply on top of the federal rate for employees working in Calgary and throughout the province.
Rather than calculating income tax withholdings manually, use the CRA's free Payroll Deductions Online Calculator (PDOC), available at canada.ca. Enter the employee's province, pay frequency, gross pay, and TD1 credit amounts and the calculator produces exact withholding figures. You can also refer to the T4032 Payroll Deductions Tables, which the CRA publishes annually and which are available as downloadable PDFs broken down by province and pay period.
Before you can calculate income tax withholdings accurately, every new employee must complete two TD1 forms:
If an employee does not submit a TD1, you must withhold income tax as though they are claiming only the basic personal amount. Employees who have multiple jobs, significant investment income, or other deductions may ask you to withhold additional tax by completing the relevant section of the TD1. Collect signed TD1 forms at the time of hire, retain them in the employee's file, and update them whenever the employee's personal circumstances change. Failure to collect TD1s does not excuse you from remitting the correct amount of income tax — that obligation remains with the employer.
The payroll remittance cycle follows a straightforward sequence, but each step must be completed on time and in full:
Remittance frequency depends on your average monthly withholdings. New employers and those with average monthly withholdings under $25,000 are typically assigned a monthly remittance schedule — payments are due by the 15th of the month following the pay period. Larger employers may be assigned an accelerated schedule requiring remittances within three or seven days of the pay date. Check your remittance schedule on My Business Account and never assume your frequency has stayed the same from year to year — the CRA reassigns employers annually based on prior-year withholding averages.
The CRA treats unremitted source deductions as funds held in trust. If your business fails to remit, the CRA can pursue the full amount — including both the employee deductions you withheld and the employer matching contributions you owe — along with interest and penalties. Critically, this liability does not disappear if the business is incorporated. Directors of corporations can be personally assessed for unremitted payroll deductions under section 227.1 of the Income Tax Act. The CRA will pursue directors personally if the corporation cannot satisfy the debt, and a due diligence defence is available but difficult to establish after the fact.
This is not an area where business owners can afford to be casual. A single missed remittance period can trigger a 10% penalty, and repeated failures attract a 20% penalty. Interest compounds daily on unpaid amounts.
At the end of each calendar year, you must prepare a T4 slip for every employee who received employment income. The T4 reports the employee's total gross employment income, income tax deducted, CPP contributions, and EI premiums for the year. T4 slips must be distributed to employees and filed with the CRA — along with the accompanying T4 Summary — by February 28 of the following year.
Missing the T4 deadline carries a penalty of 3% of the total remuneration reported on the T4 Summary, subject to minimums and maximums based on the number of slips filed late. Errors on T4s — such as incorrect CPP or EI amounts — can trigger reassessments and require amended slips, which create additional administrative burden.
Even diligent employers run into trouble with payroll. The most common errors include:
Employer payroll records — including T4s, remittance records, and payroll journals — must be retained for a minimum of six years from the end of the tax year to which they relate. The CRA can audit payroll records at any time within that window.
Payroll compliance is one of the areas where working with an experienced firm pays for itself quickly. Swift Accounting Calgary handles the full payroll cycle for small and mid-sized businesses: calculating source deductions using current CRA rates, managing remittance schedules, preparing T4 slips and T4 Summaries, and keeping your records audit-ready. If you are setting up payroll for the first time or have fallen behind on remittances, getting professional guidance early is the most cost-effective decision you can make.
Ready to take payroll off your plate? Contact Swift Accounting today to discuss payroll services tailored to your business.
The CRA charges a penalty of 3% for amounts one to three days late, 5% for four to five days late, 7% for six to seven days late, and 10% for amounts more than seven days late or not remitted at all. A 20% penalty applies if this is a second or subsequent failure in a calendar year and the failure was made knowingly or under circumstances amounting to gross negligence. Interest compounds daily on both the unpaid deductions and the penalties.
Yes. Under section 227.1 of the Income Tax Act, directors of a corporation are jointly and severally liable for the corporation's unremitted source deductions, including the employer's share of CPP and EI. A director can argue a due diligence defence if they took active steps to prevent the failure, but this is a high bar to meet. The safest approach is to ensure remittances are made on time every period.
You are not required to use PDOC specifically. Any method that produces the correct withholding amount is acceptable — dedicated payroll software, manual calculation using T4032 tables, or PDOC. What matters is that the amounts withheld and remitted are accurate and on time. PDOC is free and is updated immediately when rates change, making it a reliable option for employers running payroll manually or verifying software outputs.
You must begin withholding and remitting source deductions starting with the very first paycheque you issue to a new employee. There is no grace period. Collect the employee's federal and provincial TD1 forms on or before their first day of work, register your payroll account with the CRA (a business number with an RP program account) if you have not already done so, and include the new employee's deductions in your next remittance. Waiting until the employee has been with you for a few weeks is a common and costly mistake.
Free 30-Min Consultation · No Obligation
Our Calgary team handles personal tax, corporate returns, GST/HST, payroll, and bookkeeping — all under one roof.
Swift Ltd · Calgary, Alberta · swiftltd.ca