Knowing the rules of Deductions at Source (DAS) for the Canada Pension Plan (CPP) and Employment Insurance (EI) is important for small businesses in Toronto and Mississauga because; a) errors in payroll remittances to the government can result in hefty penalties and b) it is a significant consideration for when deciding to pay out to the owner-manager(s) salary or dividend.
Canada Pension Plan
Contributions to the CPP give the contributor the right to retirement benefits upon reaching retirement age. Unlike regular retirement plans (such as RRSP and RPP), however, contributions to CPP are not optional.
ALL salaries paid by the small business, including the owner-manager’s salary, are subject to CPP deductions at source (DAS). These deductions are calculated as such:
- Deduction from the salary payment: 4.95% of gross salary.
- Employer contribution, beyond that withheld from the employee’s salary: 4.95% of gross salary.
- Only the first $52,500of gross annual salary paid to an employee is subject to CPP. This results in a maximum annual CPP contribution of$2,425.50.
- The basic exemption is $3,500 i.e. the first $3,500 of salary paid out per year is not subject to CPP contributions.
Unincorporated self-employed individuals are also subject to CPP. However, they do not need to remit it to the government on a regular basis. Instead, their CPP contribution will be calculated at year end when filing their personal income taxes and will be payable to the CRA along with the payment of their income tax balance in April.
Employees, in general, have to pay EI as part of the DAS. However, self-employed individuals and business owners as well as their immediate family, with over 40% ownership of the voting shares of a company, are exempt. They may, however, elect to pay EI contributions if they so wish and such election would give them access to EI benefits in the event of interruption of their income.
EI DAS is computed as 1.88% of the employee’s earnings for the period up to an annual limit for insurable earnings of $48,600. The employer’s share of the EI contribution is 2.63% of the insurable earnings of the employee up to the same annual limit.
Keep in mind that when self-employed individuals opt into the EI program they are only required to pay the 1.88% employee share of the contributions. This is in contrast to the CPP where self-employed individuals pay twice the amount paid by regular employees as they pay both the employee and employer shares.
The CRA provides a great tool to help small businesses in Canada to compute their DAS including CPP and EI discussed above. There are many payroll services providers throughout Toronto, Mississauga and the rest of the country who can assist your small business with your payroll filings.
As Chartered Accountants in Toronto and Mississauga, we can help you prepare your payroll filings and help assess whether you should be deducting amounts at source from your employees. Contact a Chartered Accountant for more tax tips by email at firstname.lastname@example.org or call us at 647-725-2537 for a free consultation.
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Frequently Asked Questions
Can you collect EI if you own a business?
Yes, self employed Canadians are able to apply for the EI program and by doing so may be eligible for EI sickness, compassionate care and family caregiver benefits only.
Are Business owners exempt from EI?
Self employed individuals as well as business owners (including their immediate family) with over 40% ownership in a company are exempt from EI.
Can I claim EI if I am self employed?
You can apply for the EI Program which could allow you to be eligible for the following benefits: maternity, parental, sickness or compassionate care benefits. In addition, there are family care benefits, both for injured/ill persons under and above the age of 18.
Do you have to pay EI on self- employed earnings?
Self- employed workers do not have to pay EI premiums although as a result they pay double the CPP. Although, self employed individuals are able to apply for the EI program, which provides special benefits such as maternity, parental and sickness benefits.