CRA Payroll Deductions Explained: CPP, EI and Income Tax Basics for 2026

Three Deductions, One Remittance, Zero Grace Period

From the moment you issue your first paycheque as a Canadian employer, you take on a legal obligation that runs every single pay period, not just once a year. Every payroll run requires you to correctly calculate and withhold three separate amounts from each employee's pay—Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and federal/provincial income tax—then remit the total to the Canada Revenue Agency (CRA) by a deadline that depends on your specific remitter category.

Get any of these calculations wrong, and the consequences compound quickly: CRA penalties, daily compounding interest, and in serious cases, personal director liability that follows you even if your corporation cannot pay. Unlike income tax filing, where you reconcile once a year, payroll errors repeat across every pay period until caught—a mistake on your first pay run of 2026 means correcting it across 26 or 52 subsequent pay periods.

Deduction #1: Canada Pension Plan (CPP) Contributions

CPP applies to every employee aged 18 to 69 earning above the basic exemption amount. Between ages 65 and 70, an employee can elect to stop contributing, but only by filing form CPT30—it is not automatic.

The Basic CPP Calculation (CPP1)

For 2026, the contribution rate remains 5.95% for both employee and employer, applied to pensionable earnings above the $3,500 basic exemption, up to the Year's Maximum Pensionable Earnings (YMPE) of $74,600—a meaningful jump from $71,300 in 2025. This means the maximum employee CPP contribution for 2026 is $4,230.45, and as the employer, you must match that dollar for dollar—another $4,230.45 per employee earning at or above the YMPE. [citation:1][citation:2]

CPP2: The Second Tier Many Employers Still Get Wrong

Since 2024, a second tier of CPP applies to earnings between the YMPE and a higher ceiling called the Year's Additional Maximum Pensionable Earnings (YAMPE). For 2026, the YAMPE rises to $85,000 (up from $81,200 in 2025). CPP2 is calculated at 4.00% each for employee and employer on earnings in that band, producing a maximum CPP2 contribution of $416.00 per side. Combined, an employee earning at or above $85,000 contributes a maximum of $4,646.45 in total CPP for 2026 ($4,230.45 CPP1 + $416.00 CPP2)—and the employer matches that same amount. That is $9,292.90 in combined CPP cost per high-earning employee, before a single dollar of actual salary has been paid out. This second tier is genuinely where payroll systems trip up. If your software still has last year's YAMPE hardcoded, employees earning between the old and new ceiling are being under-deducted right now, and the shortfall surfaces at year-end reconciliation—often with interest already accruing. [citation:1]

Deduction #2: Employment Insurance (EI) Premiums

For 2026, the EI premium rate for employees is 1.63% (a slight decrease from 1.64% in 2025), with maximum insurable earnings of $68,900—up from $65,700. This produces a maximum employee EI premium of $1,123.07 for 2026. Once an employee's insurable earnings reach that ceiling, EI deductions stop entirely for the remainder of the calendar year, and their net pay rises slightly for the rest of the year as a result. [citation:3][citation:10]

Unlike CPP, there is no basic exemption for EI—it applies to every dollar of insurable earnings from the first pay period.

The Employer Multiplier: 1.4x

This is a structural difference from CPP that surprises new employers: you do not match the employee's EI premium dollar for dollar. Instead, employers pay 1.4 times what the employee pays—producing a maximum employer EI premium of $1,572.30 for 2026. [citation:3][citation:6]

Deduction #3: Income Tax Withholding

Unlike CPP and EI, which are flat-rate calculations, income tax withholding depends on three factors: the employee's TD1 claim amounts, their gross wages, and your pay frequency. There is no employer-side income tax contribution at all—this deduction is entirely employee-borne; you simply withhold and remit it on their behalf.

The TD1 Forms: Mandatory Before the First Paycheque

Every new employee must complete two TD1 forms before their first pay—one federal, one provincial—declaring personal tax credit amounts that reduce the income tax withheld each pay period. For 2026, the federal basic personal amount is $16,452, meaning the first portion of income is effectively tax-free at the federal level for most employees, before provincial amounts are applied separately on top. [citation:1]

If a new hire does not submit a TD1, you must default to withholding at the highest rate with no credits claimed. Critically, there is no retroactive correction for amounts under-withheld in this scenario—any shortfall becomes the employee's problem when they file their personal return, not yours to fix after the fact.

How Remittance Frequency Actually Works

This is one of the most misunderstood parts of Canadian payroll: you do not choose your remittance schedule. The CRA assigns it based on your Average Monthly Withholding Amount (AMWA)—calculated from your total payroll deduction remittances (CPP + EI + income tax combined) from two calendar years prior.

The Four Remitter Categories for 2026

Quarterly (new or existing small employer): AMWA under $3,000, perfect compliance record. Remittance deadline is the 15th of the month after each quarter (April 15, July 15, October 15, January 15). [citation:7]

Regular: AMWA under $25,000. Remittance deadline is the 15th of the following month.

Accelerated Threshold 1: AMWA $25,000 to $99,999.99. Remittance deadlines: 1st-15th due by the 25th; 16th-end of month due by the 10th of next month. [citation:7]

Accelerated Threshold 2: AMWA $100,000 or more. Remittance deadline: within 3 working days of each pay date, electronic remittance only. [citation:4]

Conclusion: Get Payroll Right from Day One

Payroll deduction accuracy compounds in importance the more employees you have and the faster you are growing. Consider professional payroll support if your AMWA is approaching a threshold change, if you have employees in Quebec alongside other provinces, if you are unsure whether your software is applying the correct 2026 CPP2 and EI figures, or if you have already received a remitter type change notice and want help adjusting your process before the next deadline.

If you would like your payroll setup reviewed for 2026 accuracy, or want help managing remittances correctly across provinces, our team at CA-Sir works with Canadian employers on payroll compliance year-round. Contact us today to book a consultation.