Enhanced CPP/QPP Payroll Deduction Rule

Summary#

The final regulation Regulations Amending the Income Tax Regulations (Enhanced CPP Contributions) updates how employers calculate income for payroll withholding so that the extra Canada Pension Plan or Québec Pension Plan contributions are treated correctly. The change took effect on January 1, 2023 and aligns the regulations with an Income Tax Act deduction that has existed since 2019.

What it does#

• Changes subsection 100(3) of the Income Tax Regulations so that an employee’s enhanced CPP or QPP contributions are deducted from employment income when employers calculate income tax to withhold.
• Explicitly links the deduction to paragraph 60(e.1) of the Income Tax Act, which allows a tax deduction for the enhanced portion of CPP/QPP contributions.
• Brings the payroll withholding rules into line with the enhanced CPP/QPP rules that started in 2019 and with earlier legislative changes (part of the CPP enhancement begun under amendments from 2016).

Who's affected#

• Employers who calculate and withhold income tax from employees’ pay.
• Employees who pay the enhanced portion of the Canada Pension Plan (CPP) or the Québec Pension Plan (QPP).
• Payroll service providers and payroll software vendors that implement withholding calculations.
• Self-employed people are affected by the underlying tax deduction rules, but this regulation mainly changes employer withholding rather than self-employment reporting.

Why it matters#

• It prevents employers from withholding too much income tax during the year by ensuring the extra CPP/QPP contributions are removed from the taxable-pay base before tax is calculated. For someone contributing near the maximum insurable earnings, over-withholding was estimated to be between $4 and $168 in a year if the change were not applied.
• That means employees keep a bit more cash during the year instead of waiting for a refund on their tax return.
• It reduces confusion and inconsistency between the payroll rules and the existing deduction in the Income Tax Act, and requires only minor updates for employers and payroll systems.
• The rule formally replaced temporary administrative relief that allowed employers extra time to update systems; that relief ended on December 31, 2022.