153(1)(a) Withholding Tax: Income Tax, CPP, and EI Deductions

Paragraph 153(1)(a) of the Income Tax Act requires every Canadian employer to deduct income tax at source from salary, wages, and other remuneration and send it to the Receiver General. In practice the section 153(1)(a) withholding requirements sit alongside two other mandatory deductions on every paycheque: Canada Pension Plan contributions and Employment Insurance premiums. Getting any of the three wrong exposes the employer to automatic penalties, daily interest, and, for incorporated businesses, personal liability for the directors who were in office when the failure happened.

What Counts as Remuneration

The phrase “salary, wages, or other remuneration” in section 153(1)(a) is written broadly on purpose.¹ It picks up regular hourly and salaried pay, bonuses, commissions, vacation pay, retroactive raises, and severance paid on termination. Gratuities the employer routes to workers count. So do non-cash benefits with real economic value, such as a company vehicle or an employer-paid housing allowance, once the employer converts them to a taxable amount for payroll purposes.

Fees and commissions paid for services rendered outside of employment fall under a different paragraph, 153(1)(g), with lighter withholding rules.¹ That split is why worker classification matters so much: if you treat someone as a contractor and the CRA later decides they were an employee, you owe the tax, CPP, and EI you should have deducted, plus your own employer share of CPP and EI, plus penalties and interest. The CRA looks at the full working relationship, including who controls how the work is done, who owns the tools, and whether the worker faces a real risk of loss.² Either party can ask the CRA for a ruling on a worker’s status by June 29 of the year following the year in question.

The Three Deductions

Every paycheque paid to an employee carries three separate withholdings. Each has its own rate and its own annual ceiling.

Income Tax

Income tax withholding is driven by the employee’s pay, pay frequency, and the personal tax credits they claim on their federal and provincial TD1 Personal Tax Credits Return. The CRA publishes payroll deduction tables and an online calculator that handles the math; there is no flat rate, because withholding rises as pay reaches higher brackets. Every new hire must complete both a federal TD1 and a provincial or territorial TD1, with Quebec employees using a separate provincial form.³

For 2026, the federal basic personal amount ranges from $14,829 to $16,452 depending on the employee’s net income.⁴ If an employee doesn’t hand in a TD1, you must withhold as if they claim only the basic personal amount. When an employee’s circumstances change in a way that reduces their credits, they have seven days to file an updated form. Providing false information on a TD1 carries a penalty of at least $100.⁵

You also need the employee’s Social Insurance Number within three days of the start date.⁶ An incorrect SIN corrupts the employee’s CPP earnings record. Keep the signed originals; auditors ask for these first.

Canada Pension Plan

For 2026, the employee and the employer each contribute 5.95% on pensionable earnings between the $3,500 basic exemption and the $74,600 yearly maximum, producing a maximum annual contribution of $4,230.45 for each party.⁷ A second tier, CPP2, applies at 4% on earnings between $74,600 and $85,000, with a maximum CPP2 contribution of $416 for each party.

Employment Insurance

Employees outside Quebec pay EI premiums at $1.63 per $100 of insurable earnings in 2026, up to maximum insurable earnings of $68,900, which caps the annual employee premium at $1,123.07.⁸ The employer pays 1.4 times the employee rate, or $2.28 per $100 of insurable earnings. Quebec has its own premium schedule because its provincial plan covers some of the same ground.

Non-Cash Benefits

Benefits with economic value are part of pay for withholding purposes. When you give an employee personal use of a company car, below-market housing, or employer-paid insurance premiums, you calculate the taxable value and add it to their income for the pay period.⁹

The company vehicle is the most common trap. The benefit has two pieces. The standby charge for an employer-owned vehicle is 2% of the original cost (including taxes) for each month the vehicle was available. The operating expense benefit uses a fixed rate of $0.34 per personal kilometre in 2026.¹⁰ Anything the employee reimburses reduces the taxable amount. Finish these calculations by year-end so the benefit lands on the T4.

How Often You Remit

The CRA sets your remittance frequency by average monthly withholding amount (AMWA), calculated over the previous two calendar years.¹¹ The bigger your payroll, the tighter the schedule.

Quarterly remitter: AMWA under $3,000, with a clean 12-month compliance history. Due the 15th of the month after each quarter ends.
Regular remitter: AMWA under $25,000. Due the 15th of the month following the pay period.¹²
Accelerated Threshold 1: AMWA between $25,000 and $99,999.99. Twice a month, due the 25th for pay issued in the first 15 days and the 10th of the following month for pay issued from the 16th onward.
Accelerated Threshold 2: AMWA of $100,000 or more. Due within three working days of the end of each roughly weekly period (1st–7th, 8th–14th, 15th–21st, and 22nd–end).

Most employers pay through My Business Account or online banking; mailed remittance vouchers still exist but electronic payment is standard and, for many, mandatory.

What It Costs to Get It Wrong

Late Remittances

Missing a remittance deadline triggers an automatic penalty on the overdue amount that scales with how late the payment arrives:¹¹

1 to 3 days late: 3%
4 to 5 days late: 5%
6 to 7 days late: 7%
More than 7 days late, or unpaid: 10%

A second failure in the same calendar year can double to 20% where the CRA finds the failure was made knowingly or through gross negligence.¹³ Interest accrues daily on unpaid balances at the CRA’s prescribed rate, set quarterly.

Failing to Withhold at All

Not deducting in the first place is treated more harshly than deducting and paying late. Under section 227(8), an employer who fails to deduct the required amount faces a penalty of 10% of what should have been withheld, rising to 20% for a repeat failure in the same year involving knowing disregard or gross negligence.¹³ The employer is also personally liable for the full amount that should have been deducted. That is what makes contractor misclassification so expensive.

The Deemed Trust

The moment you deduct income tax, CPP, or EI from an employee’s pay, those funds are held in a deemed trust for the Crown under section 227(4), separate from your business assets even if you never move them to a separate account.¹³ Using them as operating cash is not permitted. If the business fails, the CRA’s claim on those amounts ranks ahead of secured creditors, and the CRA can demand the funds back from a secured lender who received sale proceeds that should have covered unremitted deductions. The CRA doesn’t need to register its interest in any provincial registry to enforce this priority.¹⁴ Businesses under cash-flow pressure sometimes raid payroll withholdings. That decision can follow the people behind the business long after it closes.

Personal Liability for Directors

When a corporation fails to withhold or remit under section 153, the directors at the time of the failure are jointly and severally liable for the unremitted amounts along with any interest and penalties.¹⁵ The CRA has to try to collect from the corporation first, but once those efforts fail, directors are on the hook personally.

Two defenses matter. A director who exercised the degree of care, diligence, and skill of a reasonably prudent person to prevent the failure is not liable; in practice, that means actively monitoring payroll compliance rather than trusting management to handle it. And the CRA cannot assess a director more than two years after they last ceased to be a director. Resigning doesn’t erase liability for failures during your tenure, but it starts the clock on that two-year window.

Year-End: T4 Slips and the Summary

At year-end, prepare a T4 slip for every employee who received remuneration during the calendar year, showing total earnings and total income tax, CPP, and EI deducted. A T4 Summary aggregates the slips and should reconcile to the amounts remitted through the year. Both are due by the last day of February following the reporting year.¹⁶ If you file six or more information returns of any type, they must be filed electronically.¹⁷

Late filing carries daily penalties that scale with the number of slips:¹⁸

1 to 50 slips: $10 per day, up to $1,000
51 to 500 slips: $15 per day, up to $1,500
501 to 2,500 slips: $25 per day, up to $2,500
2,501 to 10,000 slips: $50 per day, up to $5,000
10,001 or more slips: $75 per day, up to $7,500

The minimum is $100, and the underlying statute lets the daily amount run for up to 100 days.⁵ A midsized payroll that simply forgets to file can rack up thousands before anyone notices. A February calendar reminder is cheap insurance.

1
Department of Justice Canada. Income Tax Act – Section 153
2
Canada Revenue Agency. Employee or Self-employed
3
Canada Revenue Agency. Get the Completed TD1 Forms From the Individual
4
Government of Canada. Payroll Deductions Tables – General Information
5
Department of Justice Canada. Income Tax Act – Section 162
6
Canada Revenue Agency. Get the Social Insurance Number (SIN) From the Individual
7
Canada Revenue Agency. CPP Contribution Rates, Maximums and Exemptions
8
Canada Revenue Agency. EI Premium Rates and Maximums
9
Canada Revenue Agency. Employers’ Guide – Taxable Benefits and Allowances
10
Canada Revenue Agency. Automobile Provided by the Employer
11
Canada Revenue Agency. Employers’ Guide – Payroll Deductions and Remittances
12
Canada Revenue Agency. When to Remit (Pay)
13
Department of Justice Canada. Income Tax Act – Section 227
14
Canada.ca. Information on Deemed Trust
15
Department of Justice Canada. Income Tax Act – Section 227.1
16
Canada Revenue Agency. Employers’ Guide – Filing the T4 Slip and Summary
17
Canada Revenue Agency. Reminder: Changes to the Electronic Filing of Information Returns
18
Canada Revenue Agency. When to File Information Returns