Income Tax Withholding & Payroll Vocabulary

Learning Objectives

• Identify the correct province or territory of employment (POE) for payroll income-tax withholding.
• Explain the purpose and mechanics of the federal and provincial/territorial Personal Tax Credits Return (TD1 & TD1-WS).
• Determine an employee’s net taxable income (NTI) for the current pay period.
• Describe the four CRA-approved methods of calculating income-tax deductions (tables, PDOC, manual, formula).
• Manually calculate federal and provincial/territorial income tax using paper tax tables.

Legislative Framework & Key Terms

• Income tax is withheld at source under the Income Tax Act and detailed in the Income Tax Regulations (ITR).
• Employers remit deducted tax to CRA according to their CRA remittance schedule.
• CRA terminology vs. payroll jargon:
  • CRA “gross remuneration” = payroll “gross taxable earnings (GTE)”.
  • CRA “taxable remuneration” = payroll “net taxable income (NTI)”.
• Québec administers its own provincial income-tax system; this chapter covers federal + 12 other jurisdictions.
• First Nations employees: s 87 Indian Act may exempt employment income. Employer may ask for CRA Form TD1-IN.

Province (or Territory) of Employment Rules

Core rule

• Physical reporting: If the employee physically reports to an establishment, withhold using that jurisdiction.
• Remote work – attached establishment: If working remotely but would reasonably report to / be supervised by a local establishment, use that establishment’s jurisdiction.
• Remote work – no establishment: If no establishment in employee’s location, use the jurisdiction from which they are paid.
• Paid from outside Canada: Use CRA tables “In Canada Beyond the Limits of Any Province/Territory or Outside Canada – T4032OC”; provincial tax = 0.

Decision-tree (text version)

1. Does the employee physically report to an establishment? → yes → POE = that jurisdiction.
2. No. Is there an establishment to which the employee is reasonably attached? → yes → POE = that establishment’s jurisdiction.
3. No. POE = jurisdiction of the payroll office that pays the employee. If non-resident payer, use T4032OC.

Illustrative examples

• Farida (BC office) → BC tax.
• Thanh (remote MB, attached to MB office) → MB tax.
• Rosita (remote YT, no YT office, paid from AB) → AB tax.
• Max (US company, serves BC clients, paid from US) → use T4032OC; federal tax only.

Remuneration Subject to Income Tax

Taxable remuneration

• Salary, wages, overtime, retroactive pay, commissions, pay in lieu of notice.
• Vacation pay, bonuses, gratuities.
• Pensions, retiring allowances, severance, death benefits.
• Taxable allowances & the fair-market value (FMV) of taxable benefits.

Tax-deductible amounts (reduce NTI)

• Enhanced portion of CPP/QPP contributions.
• Employee RPP contributions.
• RRSP contributions (including employer contributions made via payroll).
• Union dues (CRA only; Québec tax handles union dues differently).
• Northern residents deduction if claimed on TD1.
• CRA-authorized deductions (e.g. T1213 letters).

Enhanced CPP deduction mechanics

• CPP rate on pensionable earnings up to YMPE: 5.95\%.
• Enhanced component = 1.0\% of contributory earnings within YMPE plus 4\% on the new second earnings layer (YMPE→YAMPE).
• Payroll reduces NTI each pay by:
  \text{CPP contribution}\times\left(\dfrac{0.01}{0.0595}\right) for first-layer contributions plus the full 4 % second-layer contribution.

Numeric example – first-layer

• Pay-period CPP = 219.58.
  NTI deduction =219.58\times\left(\dfrac{0.01}{0.0595}\right)=36.90.

Numeric example – second-layer

• Excess earnings =3,825.00; 4 % contribution =153.00 (entire amount lowers NTI).

Federal Personal Tax Credits Return (TD1)

Purpose & timing

• Informs employer of non-refundable tax credits to reduce tax withheld.
• Must be completed when:
  1. Employee starts new job/pension;
  2. Credits change;
  3. Employee wants extra tax withheld;
  4. Employee claims northern residents deduction.

Lines 1-13 overview (2025 amounts)

1. Basic personal amount (BPA) – 16,129 standard; high-income proration via TD1-WS.
2. Canada caregiver – infirm child
3. Age amount – 9,028 full; prorated 45,522\rightarrow105,709.
4. Pension income – lesser of 2,000 or expected pension.
5. Tuition – total fees >100 per institution.
6. Disability – 10,138 with approved T2201.
7. Spouse/CLP amount – BPA minus spouse’s net income (with infirm add-on).
8. Eligible dependant – BPA minus dependant’s net income (with infirm add-on).
9. Caregiver – spouse/ED infirm ≥18 – variable; use TD1-WS.
10. Caregiver – other infirm ≥18 – 8,601 full or partial.
11. Transfers from spouse/CLP – unused age, pension, tuition, disability.
12. Transfers from dependant – unused disability or tuition.
13. TOTAL – used to assign federal claim code.

Federal claim-code table (excerpt)

• Code 0 = no credits; 1 = 0\rightarrow16,129; … 7 = 30,019.01\rightarrow32,797; X = >41,131 (manual); E = exempt.

Compliance & penalties

• Employee must update TD1 within 7 days of status change.
• Incorrect claim → CRA penalties 25 per day (min 100, max 2,500).
• Employer must question forms that look false.

Example – Trevor Fournier (2025)

• BPA 16,129 (line 1)
  Tuition 4,750 (line 5)
  Eligible dependant 11,494 (line 8)
  Total 32,373 → federal claim code 7.

Provincial / Territorial TD1 (TD1**)

• Must be completed in addition to federal TD1 if any credit other than BPA is claimed or total > jurisdictional BPA.
• Same credit categories but amounts differ by jurisdiction.
• Example forms: TD1AB & TD1AB-WS (Alberta BPA 22,323; claim-code 7 range 38,288.01\rightarrow41,481).
• Trevor’s TD1AB: BPA 22,323 + eligible dependant 17,688 → total 40,011 → AB claim code 7.

CRA Methods of Calculating Income Tax

1. Payroll Deductions Tables (T4032)
   • Separate PDF per jurisdiction (AB = T4032AB).
   • Weekly, Bi-weekly, Semi-monthly, Monthly ranges.
2. Payroll Deductions Online Calculator (PDOC)
   • Web-based; uses exact earnings; returns CPP, EI, tax.
   • Updated Jan 1 & Jul 1 or when rates change.
3. Manual method
   • Used when claim code X, labour-sponsored funds, or earnings exceed tables.
   • Three-stage annualization then proration (not examined in this course).
4. Formula method (T4127)
   • Embedded in payroll software; uses total claim amounts, not claim codes.
   • Option 1 (general) & Option 2 (for fluctuating commission income).

Table method – Step-by-step illustration (Trevor, monthly pay)

1. Compute NTI 2,625.42 (after CPP-enhanced & RPP deductions).
2. Federal table: find NTI range 2,610\text{–}2,644, claim-code 7 → 179.30.
3. AB table: same NTI range 2,624\text{–}2,658, claim-code 7 → 56.15.
4. Total tax =179.30+56.15=235.45.

PDOC walk-through (screens summarized)

• Enter POE, pay frequency/date, gross income, taxable benefits, RPP/RRSP, claim codes, YTD CPP/EI, etc.
• Result screen shows precise CPP, EI, federal & provincial tax; can differ slightly from tables because of midpoint rounding.

Payroll Calculation Template (Gross-to-Net)

Worked example – Faith Delacruz (Bi-weekly, Alberta)

Scenario A – first CPP layer & EI still in effect

• GTE 3,150.00 (salary 2,850 + car allowance 300).
• Taxable benefit: GTL 18.75.
• PE 3,168.75; IE 3,150.00.
• Enhanced CPP deduction 30.34.
• NTI 3,063.41.
• CPP 180.53; EI 51.66; Fed tax 572.35; AB tax 259.10.
• RPP employee 75.00.
• Net pay 2,011.36.

Scenario B – first CPP & EI maxed; second CPP layer now applies

• Enhanced deduction = full second-layer CPP 126.75.
• CPP first-layer 0; CPP 2 126.75; EI 0.
• NTI 2,967.00; taxes 547.40+249.00.
• Net pay 2,151.85.

Scenario C – CPP second layer maxed too

• No CPP/EI deductions; no enhanced deduction.
• NTI 3,093.75; taxes 578.60+264.15.
• Net pay 2,232.25.

Request to Reduce Tax Deductions at Source (T1213)

• Employees expecting large refunds (e.g. childcare, support, large RRSP) can apply to CRA.
• CRA issues Letter of Authority authorizing reduced withholding (valid one calendar year).
• Payroll must keep letter, adjust withholding method:
  • Formula payrolls: Compute F1 factor.
    F1 = \text{Approved annual deduction}\times\dfrac{\text{Total pay periods}}{\text{Periods remaining}}.
  • Manual payrolls: Allocate approved amount evenly over remaining pays.

Example – Christine Mitchell

• Approved annual deduction: 20,000 childcare.
• 10 bi-weekly pays remain; F1 =20,000\times\dfrac{26}{10}=52,000.
• Manual approach: reduce NTI by \dfrac{20,000}{10}=2,000$$ each pay.

Troubleshooting Changes in Withheld Tax

When an employee asks why tax increased though salary stayed flat, investigate:

1. CPP/QPP status – moving from first to second contribution (larger NTI deduction) or reaching maximum (deduction ends).
2. Benefit/allowance changes – new or higher taxable benefits raise NTI.
3. RRSP/RPP/union dues changes – starting/stopping contributions changes NTI.
4. Updated TD1 / TP-1015.3-V – employee changed credits.
5. Mid-year rate changes – Jan 1 / Jul 1 federal or provincial budget updates.

Section Recaps (CRA “Content Review” pointers consolidated)

• POE determines provincial tax; remote-work tests focus on attached establishment or paying office.
• NTI = taxable remuneration less CRA-allowed deductions; both federal & PT tax use NTI.
• TD1 forms drive claim codes → tax tables; employees must update within 7 days of change.
• Four tax-calculation methods: tables (T4032), PDOC, manual, formula.
• Enhanced CPP lowers NTI each pay only when a CPP contribution is actually withheld.
• T1213 allows mid-year NTI reduction; payroll must follow CRA letter instructions.
• Payroll professionals should master gross-to-net flow to explain variances in employees’ pay.