Ever notice the giant number that proceeds the minus sign on your pay cheque? That’s your tax obligation — a bummer at first glance, but that deduction makes things easier for you come tax time. If you’re an independent contractor or self employed, you somehow have to compile your tax obligation when it’s time to file. You might wonder: how much tax is deducted from my pay? And how does that proportion line up with provincial and federal guidelines? Tax obligations are a common topic of conversation when you meet with a financial advisor. But if you want the Cole’s notes now, you’re in luck. We’ll walk you through the ins and outs of gross versus net pay, Canadian tax deductions, and by the end? You’ll know exactly how much tax is deducted from your pay.
Table of contents
- How do you calculate gross and net pay?
- How much tax is deducted from my pay?
- How much tax is deducted from my severance pay?
- How much tax is taken off a pay cheque?
How do you calculate gross and net pay?
Gross pay is your pay cheque amount before all deductions, while net pay is the amount after deductions. When people discuss salaries, that annual figure usually refers to their gross pay. Let’s dive a little deeper into gross versus net pay.
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How do you calculate gross pay?
Say you just got a job as an account executive. Your salary? $79,000 — nice! That’s your gross pay each year, aka, what your employers shell out to you before all your deductions.
You can calculate your gross pay per month simply by dividing that salary by 12. In this case, it’s $6,583 per month ($79,000/12). But that doesn’t mean you’ll get that full amount every pay cheque. The amount you do get each pay period after deductions is known as net pay.
How do you calculate net pay?
Your net pay is also known as your take-home pay. In other words, your gross pay minus all the deductions and taxes. In Canada, that $6,583 usually decreases by around 30% after taxes. But let’s look closer at exactly what’s being taken away.
Related Reading: What is the average annual income in Canada?
How much tax is deducted from my pay?
Let’s say you’re working with a bi-monthly pay cheque. That $6,583 halves into $3,291.50 every two weeks. That’s the figure under your gross pay column. But if you meander over to the tax deductions, the first thing you’ll see is Canada Income Tax (CIT).
Your CIT deduction depends on your income tax bracket. At a $79,000 salary for 2022, you’re in the “$50,197 to $100,392” federal tax bracket, which is 20.5%. That amounts to $674.30 per pay cheque. But wait — you can’t forget about provincial taxes. If you’re in Ontario, the provincial tax rate for the $50,197 to $81,411 tax bracket is 9.15%. Your province or territory of residence will impact how much tax you pay at that level.
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Put it all together? You’re looking at a 29.65% CIT deduction as an Ontario resident. In this case, that’s $975.93 off each pay cheque. But provincial tax rates and income brackets vary. Here’s what your combined federal and provincial tax rate looks like for each province:
|Province||Combined Federal & Provincial Tax Rate for a $79,000 Salary + Provincial Bracket|
|British Columbia||28.2% ($50,197 to $86,141)|
|Alberta||30.5% ($50,197 to $100,392)|
|Manitoba||37.9% ($74,416 to $100,392)|
|New Brunswick||35.32% ($50,197 to $89,775)|
|Newfoundland and Labrador||36.3% ($78,294 to $100,392)|
|Northwest Territories||29.1% ($50,197 to $90,927)|
|Yukon||29.5% ($50,197 to $100,392)|
|Nunavut||30.48% ($50,197 to $95,724)|
|Saskatchewan||33% ($50,197 to $100,392)|
|Ontario||31.48% ($81,411 to $92,454)|
|Quebec||37.12% ($50,197 to $92,580)|
|Nova Scotia||37.17% ($74,999 to $93,000)|
|Prince Edward Island||37.2% ($63,969 to $100,223)|
Does this mean your net pay biweekly is $2,315.57 if you live in Ontario? Not quite. We still have a few more deductions to walk through. Next up? EI.
Employment tax deductions in Canada
EI stands for Employment Insurance. This is a mandatory tax deduction that goes toward a pool of money for you to access if you ever lose your job through no fault of your own. EI also covers life events like sickness, pregnancy, care for a newborn or sick child, and even care for an ill family member.
But how much EI is deducted from your paycheque? That depends on the year. The Canadian government releases maximum EI premiums every year that increase depending on your salary. For 2023, the maximum annual insurable earnings is $61,500. From that salary or higher, the annual employee premium is $1,002.45. Divide that by 24 and you have your biweekly EI deduction. In our $79,000-salary example, that works out to be $41.77 per pay cheque. That’s because the employee premium for a salary over the maximum annual insurable earnings would remain the same even for a $79,000 salary.
FYI — EI premiums and maximums are federal, meaning it stays the same across all the provinces.
CPP tax deductions in Canada
CPP stands for Canada Pension Plan. Once you hit retirement age, you’ll get a monthly taxable benefit from the government that comes from your CPP contributions over the years. While 65 is the official standard retirement age, you can start your CPP benefits anytime between the ages of 60 to 70.
Similar to the EI, the CPP has a maximum amount of “pensionable earnings.” For 2022, the maximum was $64,900. And Canadians must pay 9.9% from every paycheque, as well as an additional 1.5% for the CPP enhancement. If we’re working with our $79,000 salary, your CPP deduction would look like a minimum of $325.86 per biweekly pay cheque. That amounts to $7,820.60 each year.
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Self-employment tax deductions in Canada
Self-employed individuals need to pay the same taxes as employed individuals. The only difference is that you have to do the math and calculate all your deductions on your own versus having an employer take care of it for you. Then, you’ll have to remit those amounts to the CRA every time you file your taxes.
Our advice? Set aside at least 30% of your income for CIT, EI, and CPP deductions. Even if you have a little leftover, you’ll feel more confident and secure knowing that you have enough dough to shell out come tax season!
Other deductions to consider
While CIT, CPP, and EI are the main tax deductions in Canada, you might have to pay a few other deductions depending on your place and type of employment. For example, employees of Canada’s federal government have deductions for union dues, employment-specific pension plans, and health benefits.
Related Reading: RRSP Tax Deduction
How much tax is deducted from my severance pay?
The CRA looks at severance pay the same way as they would any other type of income. Meaning? Refer to the chart above for combined federal and provincial tax rates, as well as EI and CPP rates to calculate tax deductions of your severance pay.
How much tax is taken off a pay cheque?
Bottom line? Tax deductions are a downer on your gross pay. But knowing your income tax bracket and annual CPP and EI rates will help you plan your budget accordingly. After all, financial awareness is the first step toward financial security. In addition, paying tax consistently throughout the year helps you avoid a massive lump sum payment in April. That way, you can easier manage your cash flow.
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