2026 payroll source deductions in Canada: CPP, CPP2, EI and income tax your software must get right

For 2026, a Canadian employer outside Quebec deducts CPP at 5.95% on pensionable earnings above the $3,500 basic exemption up to $74,600, CPP2 at 4% on earnings between $74,600 and $85,000, EI at 1.63% on insurable earnings up to $68,900, and federal and provincial income tax using the CRA's payroll formulas. The employer then adds its own share: an equal CPP and CPP2 contribution and 1.4 times the employee's EI premium. Payroll software should apply all of this automatically, stop each deduction at the yearly maximum, and update when the CRA publishes new formulas. You can test any tool against the worked example below.

This guide is part of the payroll and HR software comparison overview. Figures are from the CRA's 2026 tables; confirm them on canada.ca before relying on them, because they change every January.

The 2026 figures

In Quebec, the EI maximum insurable earnings are the same but the employee rate is 1.30% (maximum $895.70; employer $1,253.98), and QPP and QPIP apply instead of CPP; see Quebec payroll.

Check the maxima yourself: ($74,600 − $3,500) × 5.95% = $71,100 × 0.0595 = $4,230.45. ($85,000 − $74,600) × 4% = $10,400 × 0.04 = $416. $68,900 × 1.63% = $1,123.07.

Income tax withholding

Income tax is not a flat rate. The CRA publishes the Payroll Deductions Formulas (T4127) and the Payroll Deductions Online Calculator (PDOC). Payroll software implements those formulas using:

• the employee's federal and provincial TD1 claim amounts (or the basic amounts if no TD1 is filed);
• the province of employment (where the employee reports for work, not where they live);
• the pay frequency;
• taxable benefits and other taxable amounts added to pay;
• deductions that reduce taxable income, such as registered pension plan contributions or union dues where applicable.

The lowest federal rate is 14% for 2026, after the reduction that took effect part-way through 2025. Because tax changes can take effect mid-year, the CRA sometimes issues a July edition of the formulas; for 2026 it published one effective 1 July 2026 (with revised British Columbia and Newfoundland and Labrador amounts). Ask any vendor how quickly it applied the last mid-year change, and whether it re-calculated pay runs that had already been processed.

Worked biweekly example (illustrative)

An Ontario employee earns $2,000 every two weeks (26 pay periods) with no taxable benefits. Using the CRA's period method:

Enter the same employee in the PDOC and in the software you are evaluating. CPP and EI should match to the cent; income tax may differ by a few cents because of rounding. A larger difference means a set-up error or an outdated table.

Where deductions stop or change

Good software handles these without manual overrides:

• Year-to-date maximums: once an employee reaches $4,230.45 of CPP or $1,123.07 of EI, deductions stop for the rest of the year with that employer. The employer contribution stops too.
• CPP2 starts only once YTD pensionable earnings exceed $74,600, so it appears only for higher earners and usually late in the year.
• New employer, same year: each employer deducts up to the maximum even if the employee already contributed elsewhere. The employee may get the excess back when filing a tax return; the employer does not.
• Age: CPP is not deducted for employees under 18 or 70 and over, and employees aged 65 to 69 who are receiving a CPP or QPP retirement pension can elect to stop contributing (form CPT30). Deductions start the month after the 18th birthday and stop after the month of the 70th birthday, so the software must prorate the yearly maximum for that year.
• CPP disability: employees considered disabled under the CPP or QPP (receiving a disability pension) do not contribute.
• Non-arm's-length employment: EI may not apply to some related employees; the CRA can rule on insurability.
• Taxable benefits: some are pensionable and insurable, some are pensionable but not insurable (for example non-cash benefits for EI purposes). The software needs the right flags per earning type.
• Multiple provinces: tax follows the province of employment for each pay period.

What to check in a demo

1. Ask the vendor to run the worked example above and the same employee crossing the CPP and EI maximums in October.
2. Ask how 2027 tables will be loaded and when.
3. Check that each pay code (overtime, vacation pay, bonus, retroactive pay, gift card) has pensionable, insurable and taxable flags you can see.
4. Ask whether bonuses use the CRA's bonus method rather than being taxed as regular pay.
5. Confirm employer contributions appear in the remittance report, not just employee deductions.

These checks feed the selection checklist. Once deductions are right, the next step is remitting them on time: see remitter types and remittance due dates.

FAQ

Does the employer also pay CPP2?

Yes. The employer matches the employee's CPP2 contribution, up to $416 for 2026, on the same earnings band between $74,600 and $85,000.

Why does EI stop earlier in the year than CPP for high earners?

Because the EI ceiling ($68,900) is lower than the CPP ceiling ($74,600). A salaried employee earning $90,000 reaches the EI maximum first, then the CPP maximum, then the CPP2 maximum.

Can my software use last year's tax tables in January?

It should not. The CRA publishes new formulas effective 1 January; a pay run in January using last year's figures will under- or over-deduct. Ask vendors when they release the January update.

Is the PDOC enough to run payroll without software?

For one or two employees it can be, but you still have to track year-to-date maximums, make remittances, prepare T4s and ROEs yourself. The payback guide helps you decide when software is worth it.

Sources

• Canada Revenue Agency — CPP contribution rates and maximums, CPP2, EI premium rates, T4127 Payroll Deductions Formulas, PDOC, TD1 forms
• Justice Laws Website — Canada Pension Plan, Employment Insurance Act and Income Tax Act
• Revenu Québec — QPP and QPIP contributions for Quebec employees
• Employment and Social Development Canada — EI program and premium rate information