What is changing in the CRA 123rd Edition (July 2026) payroll deduction?
A guide to provincial income tax updates and how payroll deductions are calculated on every paycheque.
At a glance
- The CRA 123rd Edition takes effect July 1, 2026. Most employers will apply the new rates and constants starting with the first pay period on or after that date.
- The biggest provincial changes are in British Columbia, Newfoundland and Labrador, Prince Edward Island, and Yukon.
- Payroll tax is still calculated using the same T4127 building blocks: annualized income, tax brackets, personal amounts, credits, surtax, and health premiums.
- Quebec is excluded. Quebec provincial tax is administered by Revenu Québec (TP-1015.3-V), not the CRA T4127 formulas covered here.
What is new in the 123rd Edition
The following updates are based on the CRA T4127 123rd Edition provincial sections (Table 8.1) and reflect the values Beanflow uses for payroll runs on or after July 1, 2026. Where CRA provides prorated Option 1 amounts for a mid-year change, the values below already include that proration. Quebec is not listed because it follows Revenu Québec’s separate source deductions guide.
British Columbia
BC’s lowest personal income tax rate increased from 5.06% to 5.60% for 2026. Because the lower rate was used for the first six months, the CRA 123rd Edition applies a prorated catch-up rate for the second half of the year.
- July-to-December lowest rate (Option 1, prorated): 6.14%
- 2026 basic tax reduction: $690; July prorated amount: $805
- Tax reduction phase-out ends at: $44,952
Newfoundland and Labrador
NL increased the basic personal amount from $11,188 to $13,094 for 2026. The 123rd Edition uses a prorated Option 1 amount for payroll deductions in the second half of 2026.
- Basic personal amount (Option 1, prorated): $15,000
Prince Edward Island
PE introduced a new top provincial tax bracket of 20% on taxable income over $200,000 for 2026. Because the bracket did not exist in the first half of the year, the CRA 123rd Edition uses a prorated catch-up rate for July through December.
- New bracket: 21.00% on taxable income over $200,000 (Option 1, prorated)
- The previous top-bracket threshold moves from $142,250 to $142,520
Yukon
Yukon’s Table 8.1 brackets and constants are aligned with the 123rd Edition, and the territorial employment credit (K4P) is restored.
- Territorial employment credit (K4P): $1,501
For all other provinces, the 123rd Edition mainly fine-tunes bracket constants and confirms indexation factors already reflected in the January 2026 tables.
How payroll tax is calculated
Canadian payroll withholding follows the CRA T4127 Payroll Deductions Formulas. The same sequence applies to federal and provincial income tax for all provinces and territories except Quebec. Quebec uses Revenu Québec’s source deduction formulas (TP-1015.3-V). Beanflow automates each step, but here is what happens under the hood.
- Annualize the pay
Multiply the current pay period’s gross taxable income by the number of pay periods in the year (e.g., 26 for bi-weekly).
- Subtract exemptions and credits
Subtract the basic personal amount (BPA) for the employee’s province and any other applicable credits, such as the Canada employment amount or Yukon’s territorial employment credit.
- Apply the tax brackets
Use the provincial Table 8.1 brackets and constants. The formula is:
Provincial tax = (Annual taxable income × tax rate) − constant - Adjust for surtax and health premiums
Ontario applies a surtax on provincial tax over certain thresholds and the Ontario Health Premium as a separate payroll deduction. PE applies a 10% surtax on provincial tax over $13,770.
- Apply tax reductions
BC reduces provincial tax by its tax reduction credit, which phases out as income rises.
- Convert back to the pay period
Divide the annual result by the number of pay periods to get the provincial income tax withholding for the current paycheque.
Worked example: Ontario employee
Suppose an employee in Ontario earns $2,000 gross per bi-weekly pay period and has no special credits or deductions beyond the standard basic personal amount.
Step 1 — Annualize: $2,000 × 26 = $52,000
Step 2 — Taxable income: $52,000 − $12,989 (Ontario BPA) = $39,011
Step 3 — Provincial tax:
- $39,011 falls in Ontario’s first bracket (5.05%)
- Tax = $39,011 × 0.0505 − $0 = $1,970.06 per year
Step 4 — Per pay period: $1,970.06 ÷ 26 = $75.77 Ontario tax withheld
Federal tax, CPP/QPP, and EI are calculated separately and added to the total withholding.
2026 provincial basic personal amounts
The basic personal amount is the income an employee can earn before paying provincial income tax. It is one of the first inputs in the T4127 formula. Quebec is excluded from this table because it follows Revenu Québec’s source deduction rules, not CRA T4127.
| Province / Territory | Basic personal amount | Indexation | Special notes |
|---|---|---|---|
| Alberta | $22,769 | 2.0% | — |
| British Columbia | $13,216 | 2.2% | Tax reduction credit applies |
| Manitoba | $15,780 | — | Reduced above $200,000 |
| New Brunswick | $13,664 | 2.0% | — |
| Newfoundland and Labrador | $15,000* | 1.1% | *123rd Edition Option 1 prorated value |
| Nova Scotia | $11,932 – $14,932 | 1.6% | Income-based increase |
| Northwest Territories | $18,198 | 2.0% | — |
| Nunavut | $19,659 | 2.0% | — |
| Ontario | $12,989 | 1.9% | Surtax + health premium |
| Prince Edward Island | $15,000 | 1.8% | 10% surtax over $13,770 |
| Quebec | N/A | N/A | Excluded — uses Revenu Québec TP-1015.3-V, not CRA T4127 |
| Saskatchewan | $20,381 | 2.0% | — |
| Yukon | $16,452 | 2.0% | $1,501 territorial employment credit |
CPP and EI
Income tax is only part of the withholding picture. Employers also deduct Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums.
- CPP: deducted on pensionable earnings between the basic exemption and the year’s maximum pensionable earnings (YMPE). The employee and employer rates are set annually by the CRA.
- EI: deducted on insurable earnings up to the maximum annual insurable earnings, at the employee premium rate set by Service Canada.