CPP, EI and Payroll Tax Withholding in Canada
A plain-language guide to determining and calculating Canada Pension Plan (CPP), Employment Insurance (EI), and income-tax deductions when they apply to Canadian payroll.
Last updated August 2026
At a glance
- CPP funds the Canada Pension Plan. Both employee and employer contribute the same percentage of pensionable earnings, subject to the annual maximum for the employee's employment with that employer.
- CPP2 (second additional CPP) applies an extra contribution on earnings between the YMPE and YAMPE — introduced in 2024 and fully phased in by 2025.
- EI funds Employment Insurance. The employee pays a percentage of insurable earnings up to a maximum; the employer pays 1.4× the employee rate.
- Income tax is withheld using CRA's T4127 Payroll Deductions Formulas, based on the employee's claim code and TD1 forms.
- Once an employee reaches the CPP or EI maximum in their employment with the same employer, deductions for that contribution stop for the rest of the calendar year. A new employer normally starts its own CPP and EI limits.
- Quebec uses the QPP instead of CPP and has a lower federal EI rate because it also operates the Quebec Parental Insurance Plan (QPIP). The annual figures below are for employees outside Quebec.
Canada Pension Plan (CPP)
CPP is a contributory pension plan that applies to pensionable employment outside Quebec. The CRA collects contributions, while Service Canada delivers CPP benefits. Employers generally deduct CPP when the employee is at least 18 and has not reached the applicable stopping rules. Quebec employment is covered by the QPP instead.
How CPP is calculated
CPP contributions are based on pensionable earnings between two annual thresholds set by the CRA:
- Basic exemption — the annual exemption is $3,500. For regular payroll, a portion is generally allocated to each pay period rather than waiting until the employee has earned $3,500.
- YMPE (Year's Maximum Pensionable Earnings) — the upper limit on which CPP is calculated.
The employee contributes a fixed percentage of earnings between the basic exemption and the YMPE. The employer matches the employee's contribution dollar-for-dollar.
2026 CPP rates and limits
| Item | 2026 amount |
|---|---|
| Basic exemption | $3,500 |
| YMPE (maximum pensionable earnings) | $74,600 |
| YAMPE (additional maximum pensionable earnings) | $85,000 |
| Base and first additional employee rate | 5.95% |
| Base and first additional employer rate | 5.95% (matches employee) |
| Maximum employee contribution up to the YMPE | $4,230.45 |
| Maximum employer contribution up to the YMPE | $4,230.45 |
| CPP2 rate on earnings above YMPE up to YAMPE | 4.00% |
| Maximum CPP2 contribution (employee and employer, each) | $416.00 |
Rates and limits are set annually by the CRA. Verify current values at canada.ca.
CPP2 (Second Additional CPP)
Starting in 2024, a second tier of CPP contributions — called CPP2 — applies to earnings between the YMPE and a new upper limit called the YAMPE (Year's Additional Maximum Pensionable Earnings). The CPP2 rate is lower than the base CPP rate, and it applies only to the band of earnings above the YMPE.
For 2026, the YMPE is $74,600 and the YAMPE is $85,000. The regular CPP contribution reaches its annual maximum at the YMPE. CPP2 then applies at 4.00% only to pensionable earnings above the YMPE and up to the YAMPE.
Example: CPP on $80,000 of pensionable earnings in 2026
- CPP up to the YMPE: 5.95% × ($74,600 − $3,500) = $4,230.45
- CPP2: 4.00% × ($80,000 − $74,600) = $216.00
- Total employee contributions: $4,446.45
- The employer contributes the same amounts: $4,446.45
Actual per-pay deductions also depend on pay frequency, the prorated basic exemption, and year-to-date amounts in the employee's employment with this employer. A new employer normally does not reduce deductions because another employer already deducted CPP or EI; qualifying successor-employer situations can be different.
Employment Insurance (EI)
EI provides temporary financial assistance to workers who lose their jobs, are sick, or are on parental/maternity leave. Both employees and employers contribute, but the rates differ.
How EI is calculated
The employee pays a percentage of insurable earnings up to an annual maximum. The employer pays 1.4 times the employee rate. Unlike CPP, there is no basic exemption — EI applies from the first dollar of insurable earnings.
2026 EI rates and limits
| Item | 2026 amount |
|---|---|
| Maximum insurable earnings (MIE) | $68,900 |
| Employee premium rate | 1.63% |
| Employer premium | 1.4 × the employee premium |
| Maximum employee premium | $1,123.07 |
| Maximum employer premium | $1,572.30 |
These figures apply outside Quebec. Quebec has a lower federal EI rate because it operates QPIP. Employers with an approved wage-loss replacement plan may also qualify for a reduced employer EI rate. Verify the rate assigned to the payroll account at canada.ca.
When EI may not apply
EI applies to insurable employment rather than simply to every payment. Common situations that require separate review include employment between related persons, employment where the worker controls more than 40% of the corporation's voting shares, and self-employment. A worker or payer can request a CRA ruling when it is unclear whether employment is insurable. Age or receipt of CPP benefits does not by itself create an EI opt-out.
Income tax withholding
Federal and provincial income tax are withheld from each paycheque based on the CRA's T4127 Payroll Deductions Formulas. The calculation considers:
- The employee's claim code, determined by the TD1 forms (federal and provincial).
- The pay period frequency (weekly, bi-weekly, semi-monthly, monthly).
- Whether the payment is regular, a bonus, or a lump-sum — different tax methods apply.
- Deductions or credits that the CRA formulas allow when calculating withholding.
Tax methods for different earning types
| Earning type | Tax method | How it works |
|---|---|---|
| Regular wages | Periodic (TD1/claim code) | Annualizes the pay period income, applies tax brackets, divides back to the period. |
| Bonus, commission, or irregular payment | CRA bonus or irregular-payment method | Calculates the additional tax attributable to the irregular amount using the CRA formulas. |
| Qualifying retroactive lump-sum payment | Bonus, retroactive-pay, or irregular-payment withholding method | Withhold CPP, EI, and income tax using the CRA instructions for bonuses, retroactive pay, or irregular amounts. If the payment qualifies, provide Form T1198 so the employee can request the separate special tax calculation when filing their personal return. |
| Retiring allowance | Lump-sum withholding rate | Uses the prescribed lump-sum withholding rate on the taxable amount paid directly to the recipient. CPP and EI are not deducted from a genuine retiring allowance. |
TD1 forms
A new employee should complete a federal TD1 and the applicable provincial or territorial TD1 when employment begins. The forms identify personal tax credit amounts used in the withholding calculation. Employees must provide a new TD1 within the required period when a change reduces the credits they can claim; they may also submit an updated form when eligible credits increase.
Annual maximums and YTD tracking
Both CPP and EI have annual maximums for the employee's employment with a particular employer. Once the employee's year-to-date (YTD) contributions with that employer reach the applicable maximum, that employer must stop deducting for the rest of the calendar year:
- CPP: Regular CPP stops when the annual maximum is reached at the YMPE; CPP2 applies only to the band from the YMPE to the YAMPE and stops at its own annual maximum.
- EI: Employee premiums stop when the annual employee maximum is reached.
Employers must track YTD contributions carefully. Over-deducting requires a refund to the employee; under-deducting means the employer owes the difference to the CRA and may face penalties.
Employer responsibilities summary
- Determine whether each payment is pensionable, insurable, and taxable, then calculate the required deductions using current CRA formulas.
- Match the employee's CPP/CPP2 contribution dollar-for-dollar.
- Pay 1.4× the employee EI premium.
- Track YTD contributions for employment with the employer and stop deducting when that employer's annual maximums are reached.
- Remit all deductions to the CRA on the required schedule (see Remittance guide).
- Report all deductions on the employee's T4 at year-end.