What is Source deductions?
Source deductions are the income tax, CPP or QPP, and EI amounts an employer withholds from each pay cheque and remits to the government.
In Canada, employers act as the government’s collection agent for payroll taxes. Every pay period, they withhold three main amounts at source: federal and provincial income tax, Canada Pension Plan contributions (or Québec Pension Plan in Québec), and Employment Insurance premiums. Québec employers also withhold Québec Parental Insurance Plan premiums and Québec income tax. The employer adds its own CPP and EI share and remits the total.
Income tax withholding depends on the employee’s pay, pay frequency, province of employment and the claim amounts on their TD1 forms. The CRA publishes the formulas in guide T4127, Payroll Deductions Formulas, updated at least once a year, and payroll software applies them. Taxable benefits, bonuses, commissions and retroactive pay each have their own treatment, which is where manual calculations most often go wrong.
Source deductions are held in trust for the Crown from the moment they are withheld. They must be remitted on time through the PD7A process, and directors of a corporation can be held personally liable for unremitted amounts. At year-end, the totals are reported on each employee’s T4 slip and the T4 Summary, and the CRA compares them with what was remitted during the year.
An Alberta employee earns $2,500 bi-weekly. Payroll withholds federal and Alberta income tax using T4127 and the employee’s TD1 claims, plus CPP of about $140.74 (($2,500 − $134.62) × 5.95%) and EI at the current rate. The employer adds its matching CPP and 1.4 times the EI, then remits everything by the due date.
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