Why Your Paycheck is Smaller Than Your Salary: Understanding Payroll Deductions in Canada

Key Takeaways

• The amount you get in your bank account each month from your employer does not equal your total salary. There are deductions you will need to pay each paycheck. 
• Government-related deductions are taxes, employment insurance, and pension plan payments. These are typically mandatory payments you’ll be required to make. 
• Other deductions you might see are health insurance, union dues, life or disability insurance, RRSP contributions, and employment-related expenses. It’s important you understand these deductions before you sign your employment agreement since these are negotiable.

 

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Decoding Your Pay Stub: Payroll Deductions Explained

The deductions you’ll likely see on your pay stub each pay period in Canada are: 

• Taxes
• Employment insurance
• Canada Pension Plan (or Quebec Pension Plan).

You may also see deductions for RRSP contributions if your workplace has a group RRSP. 

Here are some more details about each of these deductions: 

Government Deductions in Canada

Tax Deduction

You will pay federal taxes on your income, and you will also pay taxes to your province. The federal tax rates are the same for everyone, while the province you work in can make a real difference to the amount of tax you pay each pay period. 

Your employer is responsible for deducting federal tax from your pay each period. This amount will be shown on your pay stub and so will the total amount of tax you’ve paid for the year. You can use this running total to compare your taxes paid against what you might owe for the year using tax calculators (like this one).  

A note about overtime: The amount you pay varies depending on your total expected earnings for the year. So, if you work overtime and if you would move up a tax bracket if that overtime pay was your usual salary, you will pay a higher rate of tax on that pay. But, you may be eligible to get it back at tax time (assuming you paid the right amount of tax for the rest of the year). 

E.I. = Employment Insurance

Employment Insurance (EI) is a government program in Canada that provides temporary financial assistance to unemployed workers or workers who are unable to work due to their situation, often illness, injury, or becoming a parent.  It provides up to 55% of your average insurable earnings, up to a maximum of $688 per week in 2024.

You pay for this insurance with each pay. The amount you pay will depend on your salary, but the maximum amount payable for 2024 is $1,049.12 or $834.24 in Quebec. 

As a newcomer to Canada, you may be eligible for EI benefits if you lose your job after you have been working for long enough to accrue enough ‘insurable hours’. The ‘insurable hours’ requirement is basically the number of hours you need to work to qualify for EI benefits. The number of hours varies depending on a number of factors, including the unemployment rate in your region, but it ranges from 420 to 700 insurable hours worked in the 52 weeks before your claim. 

There was a previous rule that newcomers to Canada needed to have 910 insurable hours, but this rule was eliminated in 2016. 

C.P.P. = Canada Pension Plan

The Canada Pension Plan (CPP) is a retirement-age pension that eligible workers receive monthly, starting between the ages of 60-70. If you qualify, you will receive the CPP payment for the rest of your life. 

The amount you pay into the CPP each paycheck depends on how much you earn in 2024, but the maximum total you’ll pay is $3,867.50.

We created a comprehensive guide to Canada’s Pension Plan that’s worth a read if you’re interested in your entitlement, and how being a newcomer will impact your pension amount. 

Q.P.P. = Quebec Pension Plan

Quebec has a separate pension plan. It works the same way as the CPP, but the rates are different. Payments to the QPP are typically higher than the CPP, and the maximum amount payable by employees in 2024 is $4,160. 

Additional Deductions in Canada

There are a host of other deductions you may see on your payslip. We’ll first share a list of some of the potential deductions you may see, and then dig into some of the more common ones: 

• Union dues
• Health insurance premiums
• Group life insurance premiums
• Disability insurance premiums
• Group RRSP contributions
• Employee Stock Purchase Plan contributions
• Charitable donations (pre-tax)
• Employment-related expenses, such as on-site parking or gym use, or uniforms (though, it’s not always legal for employers to charge for uniforms, depending on the province you work in). 

Health Insurance Premiums

Your employer may have a group health insurance plan that you can be entitled to as an employee. The coverage will depend on the exact policy, but may cover things like medical, dental, vision, mental health resources, and extras, like massage or physiotherapy. Some even include financial literacy or other wellness-related benefits. 

Your employer might pay for part or all of your health insurance. If the employer covers 100% of your premium, you won’t see any deduction on your payslip. However, if it only covers a percentage of the premium, then you will see a deduction for your portion of the premium. 

It’s very important that you understand how your health insurance plan works through your employer before finalizing your agreement with your employer, since these amounts are negotiable. You can negotiate your employer’s contribution to the health insurance premium as part of your overall salary package. 

Tip: If you agree to pay a portion of the health insurance premium, ask your employer what the current deductions are. While it may increase in the future, this information will help you better understand what your take home pay will be. 

RRSP Payroll Deductions

Some employers, typically larger corporations, offer Registered Retirement Savings Plan (RRSP) deductions at the payroll level. So, your RRSP contribution will be deducted from your salary and placed into an RRSP account for you, pre-tax. A significant benefit of this is that you receive the tax benefit of the RRSP contribution at the time you receive your pay, instead of at tax time in the following year. 

However, it’s worth noting that this is uncommon for small to medium-sized businesses and startups. There are fairly significant costs for doing this at the employer level, so don’t be surprised if your Canadian employer does not offer this program. 

Employer Match RRSPs Explained

Another thing worth noting here is that some of these employers offer an employer match on RRSP contributions, usually to a specified dollar amount or percentage of your overall salary. It’s important to know that employer match is offered for contributions to your employer’s group RRSP. So if you make personal contributions to, say, Wealthsimple or Questrade, your employer would not typically match that contribution. 

Tips For Newcomers: Understanding Your Pay in Canada

These tips can help you understand more about what your take-home pay will look like in Canada:

1. Don’t immediately accept your employment offer: you should take the time to first, use a take-home pay calculator to work out what you will be paid after paying the government-related deductions. Then, work out what other deductions will come off if your employer partially funds your insurance. 
2. Learn about Canada’s benefits, including the Canada Pension Plan and Employment Insurance. It’s helpful to know what you are entitled to after retirement and in case you are let go or unable to work. 
3. Check your pay stubs each pay. The people in human resources are, well, human. They can make mistakes. It’s important that you check your pay stub to make sure there are no mistakes with your pay. Has your employer deducted money for an insurance policy you didn’t sign up for? Did it miss some overtime? You’ll only know if you check your pay stub. 
4. Budget realistically based on your take-home pay, not your salary divided by 12. At the end of the day, the only number that matters for managing your budget is the number of dollars that land in your bank account.