As many know, due to the income tax act in Canada, taxable Canadians pay taxes each year. In February, the Canada Revenue Agency expects taxpayers to submit income tax returns by April 30 of every year. This applies to those working at a business in Canada or other permanent establishments. You are required to pay these taxes by law.
The contribution year starts on the 61st day of the year. The tax year, typically from March 2 to December 31 of the tax year, ends on 60 days of the following year, usually from January 1 to March 1 of the following year.
If you anxiously await your personal income taxes, there is a way to make it a more bearable situation. You can adjust the income tax withheld to ensure a bigger tax refund. Conversely, you can also have a smaller refund. Meaning, you would have more money available to you throughout the year, but a smaller (or no) payout when February rolls around.
However, before making such a decision, it is best to know all the details. Payroll deductions vary from position to position as well as person to person. it’s worth the effort to learn the ins and outs of your deductions before deciding to alter them.
Here is an in-depth article touching on them to give you a better idea about deductions and what to understand before altering them.
How Do Payroll Deductions Normally Work?
By law, employers take certain deductions from your taxable income. After these deductions, most can expect their take-home pay to be around 25-35 percent less than their gross salary.
Some deductions go towards funding public systems, such as schools and infrastructure. Others fund financial assistance programs. This includes assistance for retirement, periods of unemployment, parental leave, and more. Salary slips outline the deductions taken from your pay.
Here are the most common payroll deductions.
Canada Pension Plan or Quebec Pension Plan
Canada Pension Plan (CPP) is a government-run plan. CPP provides a taxable pension which replaces part of your income after retirement. The program is funded through contributions from employees and employers.
Quebec has a separate pension plan known as the Quebec Pension Plan (QPP). QPP operates the same as CPP but applies exclusively to the residents of Quebec.
Who Contributes to CPP & QPP?
By law an employer must deduct CPP and QPP contributions under the following conditions:
- If an employee is pensionable for part of or all of the year.
- If an employee is between 18 and 69 years old.
- You are not considered disabled as defined by the CPP or QPP.
Employers must match employee contributions and remit the total amount to the government. Those self-employed that have earned over $3,500 in a single year must also contribute to the CPP or QPP.
How CPP Contributions Are Calculated
Each year, the government sets a maximum annual pensionable earnings limit and contribution rate. This applies to both employees and employers.
In 2022, the maximum annual pensionable earnings were $64,900. The standard exemption amount was $3,500, and the contribution rate was 5.7 percent.
Employment Insurance (EI) takes a portion of earnings to provide temporary financial assistance. EI is offered to employees if they lose their job or are unable to work.
Who Contributes To EI?
Employers deduct EI premiums from pay if the employment is insurable. Employers must pay 1.4 times an employee’s contributions and remit the total amount to the government. There is no age limit for EI and self-employed may opt into it should they wish to.
How EI Premiums Are Calculated
The government sets EI premium rates and limits for annual maximum insurable earnings. In 2022, the EI premium rate was set at 1.58 percent, and the maximum insurable earnings were $60,300.
Aside from the deductions already listed, employers may have other less standard deductions. Familiarize yourself with the deductions your employer is taking from your pay. Any deductions on your payment will appear on your pay stub.
Here are some of the additional deductions you may come across:
Retirement Plan Contributions – Some businesses have group RRSPs or company pension plans. Companies match contributions either fully or partially.
Additional Insurance or Other Benefits – Some companies offer group insurance plans. This includes life insurance, extended health insurance, dental insurance, and more. In these scenarios, employees may pay a portion of the premium costs for some or all the benefits.
Union Membership Dues – You may have to pay union dues out of your wages for unionized workplaces. Employers deduct these dues from your pay and remit them.
How To Change Your Withheld Amount
To change the amount of income taxes deducted from the remuneration received in a year, you must fill out a federal Form TD1. This form includes a section to indicate the adjusted amount of taxes you’d like to deduct. Once completed, you would then submit it to your employer.
You can find more information on changing your withheld amount on Canada.ca.
Why Someone Might Want To Have More Or Less Withheld
Some may change the amount withheld for several reasons.
Increasing the amount of income tax deducted throughout the year may be optimal for you if you consistently owe a large amount at tax time.
There are some people that are eligible for a tax deduction or credit that is only taken into consideration come tax time. In this case, they could decrease the amount of taxes taken off throughout the year. This way they would have more money available to them throughout the year, but get a smaller (or no) tax refund.
Before changing your deductions, you must learn as much as you can. Find out how much your deductions are and how much they will be. Your changes could also change how much you ultimately pay, so be aware. Only make such a decision if you are absolutely sure of the outcome.
To get a baseline on how much income tax you will pay, check out our income tax calculator. While our calculator can’t take into account company-specific deductions, it will give you a good start to planning your finances by calculating how much you will own in provincial and federal income tax.
Altering your deductions could prove very helpful. Just be aware of how any changes you make will affect your income overall before moving forward.
If you’ve found yourself in debt due to income taxes, or any other reason, contact us. We provide expert advice and can help you find the right decision for you to get back on your feet.