By OptiVal Editorial Desk
Every paycheque you issue carries more than wages. On top of each employee’s gross pay, you are deducting Canada Pension Plan contributions and Employment Insurance premiums, matching the CPP out of your own pocket, and paying EI at 1.4 times the employee rate. Get any piece wrong and the Canada Revenue Agency charges interest and penalties, and those penalties start the day you are late. Here is how CPP and EI deductions actually work for Canadian employers in 2026, with the current numbers.
What CPP and EI deductions are (and why the employer pays too)
CPP and EI are not taxes on your business. They are shared social insurance contributions. For each employee, you deduct the employee’s share from their pay and remit it to the CRA along with your own employer share. Think of yourself as the collection agent: the CRA holds you personally responsible for deductions you were supposed to take, even if you forgot to take them. You cannot recover the employee’s share from the employee after the fact if you missed it, but the employer share is still due. That is the part owners learn the hard way.
CPP deductions in 2026: rates, maximums and the exemption
For 2026, the Year’s Maximum Pensionable Earnings (YMPE) is $74,600, and the basic exemption is $3,500. That exemption means the first $3,500 of each employee’s annual earnings is free of CPP. You deduct 5.95% of everything above $3,500, up to the YMPE. On a monthly payroll the exemption works out to $291.67 per paycheque.
The 2026 maximums, per the CRA’s published payroll tables:
- Employee and employer each pay 5.95% of contributory earnings, up to a maximum of $4,230.45 each.
- Self-employed individuals pay both halves, 11.90%, up to $8,460.90.
- Contributory earnings are earnings between the $3,500 exemption and the $74,600 ceiling.
A concrete example. An employee earning $60,000 a year: contributory earnings are $56,500, and 5.95% of that is $3,361.75. You deduct $3,361.75 from the employee over the year, and you pay another $3,361.75 yourself as the employer. On a $5,000 monthly paycheque, that is about $280.15 of CPP from the employee each month, matched by you.
The second tier: CPP2 on higher earners
Since 2024, there is a second CPP tier. For 2026, earnings between the YMPE of $74,600 and the Year’s Additional Maximum Pensionable Earnings (YAMPE) of $85,000 attract a further 4.00% contribution from both employee and employer, up to $416 each. No exemption applies to this tier. If you have staff earning above $74,600, your payroll setup has to handle two CPP rates and two ceilings. Most small-business payroll software does this automatically, but spreadsheet payrolls often miss it.
EI deductions in 2026: the 2026 numbers
EI works differently from CPP: there is no exemption, and the employer rate is higher. For 2026, outside Quebec:
- Maximum insurable earnings: $68,900.
- Employee premium rate: 1.63% of insurable earnings, up to $1,123.07 a year.
- Employer premium rate: 2.282% (exactly 1.4 times the employee rate), up to $1,572.30 a year.
On that same $60,000 salary, the employee pays $978.00 in EI for the year and you pay $1,369.20 as the employer. Note the rate actually fell slightly for 2026, from 1.64% to 1.63%, while the ceiling rose from $65,700 to $68,900, so the maximum premiums still went up.
One Quebec wrinkle: employees working in Quebec pay into the Quebec Pension Plan instead of CPP, and a reduced EI rate (1.30% for employees in 2026) because Quebec runs its own parental insurance plan. If you have staff in more than one province, deductions follow the employee’s province of employment, not your head office.
What counts as pensionable and insurable earnings
Salary is the obvious one, but the net is wider than most owners expect. Pensionable and insurable earnings include overtime, bonuses, commissions, retroactive pay increases, and most taxable benefits such as a company car or taxable group insurance premiums. Cash Christmas bonuses are the classic miss: the bonus goes out in December, nobody runs CPP and EI on it, and the shortfall shows up at T4 time. If you are paying something that shows up on a T4 as employment income, assume CPP and EI apply unless you have confirmed an exception.
Remitting: the deadline and what lateness costs
You remit both shares, employee and employer, to the CRA by the 15th of the month following the pay period. Most small businesses are regular monthly remitters. Miss the deadline and two things happen: interest accrues from the due date at the CRA’s prescribed rate plus 4%, and a graduated penalty applies based on how late you are, 3% for one to three days late, 5% for four to five days, 7% for six to seven days, and 10% for more than seven days late. Deliberately failing to withhold carries a 20% penalty. The penalties apply to the amount you were late remitting, not your whole payroll, but they stack with interest fast.
When an employee hits a yearly maximum, you stop deducting that item and keep the rest going. CPP stops when the employee reaches $4,230.45, CPP2 when they reach $416, and EI when they reach $1,123.07. Payroll software tracks this per employee; on manual payrolls, add a running total column or someone will keep deducting into November.
Mistakes that trip up small employers
We see the same errors repeatedly when we clean up payroll for new clients:
- Forgetting to stop at the maximum. High earners get over-deducted and the employer overpays its match. The CRA refunds the employee on their tax return, but the employer has to apply separately to recover its overpayment.
- Missing CPP2 entirely. Set up the payroll before the second tier existed and never updated it, so earners above $74,600 are under-deducted.
- Ignoring bonuses and taxable benefits. The December bonus with no CPP or EI on it is practically a tradition.
- Using the wrong province’s rates. Remote employees in Quebec (or any second province) get the head-office province’s deductions by default in many systems.
- Treating contractors like employees, or the reverse. CPP and EI only apply to employees. If the CRA reclassifies a contractor as an employee, you owe both shares retroactively, with penalties. Our guide to the contractor-versus-employee rules is worth a read before you decide.
- No payroll remittance account set up. You need a payroll (RP) account with the CRA before your first remittance. First-time employers sometimes run payroll for months with nowhere to send the money.
Payroll is one of those areas where being approximately right is not good enough. The CRA’s payroll tables are public and updated every year, so there is no reason to guess. If you would rather hand the whole thing off, our payroll service handles deductions, remittances and T4 filing for $29 per employee per month plus a one-time $149 setup, and our team is led by qualified professionals with more than 75 years of combined experience. See transparent pricing for the full rate card.
Hiring your first employee this year? Read our first-employee payroll setup checklist first, then book a free consultation and we will make sure your deductions are right from the first paycheque.
