Understanding Payroll Deductions: Personal Income Tax Rates, CPP/QPP, EI and Basic Exemption
The automation of the tax preparation and filing process has been a boon to individuals and tax preparers alike. Gone are the days of struggling to find the right box on the return, adding everything up 5 times and still getting different results, and hoping that the CRA can read your chicken scrawl. Present day tax software not only guides you through every step of the process, it also helps to optimize your allocations thereby reducing your taxes payable. There is however at least one downside to automation: Since we are more removed from the actual calculations, our understanding of our tax situation is somewhat diminished. We have an idea of what we expect to pay, which we can see every week on our paycheques (or for self employed individuals, the breathtaking moment when we see the final result on our tax return), but often we are not really sure how these amounts are derived. Below is a discussion of the tax rates, deductions and maximums to improve our comprehension of this somewhat complex topic:
UPDATED for 2019
Personal Tax Rates:
Federal Income Tax Rates
$47,630 or less: 15%
$47,631 - $95,259: 20.5%
$95,260 - $147,667: 26%
$147,667 -$210,371 : 29%
Over $210,371: 33%
Quebec Income Tax Rates
$43,790 or less: 15%
$43,791 - $87,575: 20%
$87,575 - $106.555: 24%
Over $106,555: 25.75%
To complicate matters, the combined Federal and Quebec tax rates are not simply an addition of the two rates in the same tax bracket since there is a Quebec refundable abatement of 16.5% on the federal taxes paid. For example if your salary is $40,000 your combined taxes payable will be $40,000 X (86.5% of 15%) (Federal Rate) X 15% (Quebec Rate) = $11,010 or an effective rate of 27.53%. Full list of combined Federal and Quebec tax brackets
Marginal Tax Rates vs Average Tax Rates: One of the most misunderstood concepts in tax is that concept of marginal tax rates. Essentially only the portion of the income that exceeds the tax brackets listed above are taxed at higher rate which is the marginal tax rate. For example, if your taxable income for the year is $50,000, for federal purposes the first $47,630 is taxed at 15% and ONLY the balance of $2,370 is taxed at 20.5%. As such your taxes on $50,000 is actually 15% X 47,630 + 20.5% X 2,370 = $7,630 and your actual average tax rate (federal only) on $50,000 is 15.26%
CPP/QPP Rates and Maximum Earnings:
This represents the amounts contributed to the Federal Canada pension plan, that will (hopefully) ultimately be paid back to us upon retirement. If you are an employee, you pay an amount equal to 5.1% of your salary up to a maximum of $2,748.90 for 2019. Your employer is required to contribute the same amount. If you are self employed, you are responsible for paying both amounts up to a maximum of $5,497.80. The maximum pensionable earnings for CPP purposes is $57,400 after which no further contributions are required.
See details regarding QPP (Quebec pension plan) rates and calculations
EI is also deducted directly from your pay at a rate of 1.62% up to maximum earnings of $53,100. As such the maximum amount payable is $747.36. In Quebecthe maximum amount payable is $860.22.
If you are self employed you are not required to pay EI premiums, nor are you entitled to benefits. You can however opt in to a EI program for self employed individuals , for which the benefits are limited.
Note that when a corporation employs a person who controls more than 40% of the corporation's voting shares; the employee is not required to pay EI premiums. By the same token they are not entitled to EI benefits.
Details regarding Quebec parental benefits
Basic Exemption:
All Canadian taxpayers are entitled to a basic federal exemption of $12,069 for 2019 ($15,269 in Quebec). This means that if you earn less than $12,069 annually, you are not required to pay any federal income taxes. As an employee this is usually built into the deductions at source that are deducted from your paycheque.
If you are self employed, you are required to remit taxes payable at the end of the year when you file your tax return, Once the balance due exceeds $3,000 per year, you are required to pay quarterly instalments to the government.
As an employee, all of these deductions are calculated for you by your employer and remitted on your behalf. At the end of the year, if you only have employment income and your employer is calculating them correctly, your taxes payable should be close to nil. If your are self employed, it is important to have an understanding of approximate amounts payable and ensure that (if you are not paying instalments) you have allocated the funds to pay your tax liability so that you are not left with an unpleasant surprise at the end of the year.
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Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals. She is the author of several books for small businesses and also provides financial consulting services.
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