Understanding your paycheque in Canada

KEY TAKEAWAYS

✔ Understanding the difference between your total pay (gross) and pay after deductions (net) will help you better plan your spending.

✔ Your pay stub is an important document that shows what you are paid and what gets deducted from every pay.

✔ All employees get deductions taken off their paycheques including income tax, employment insurance, and the Canada Pension Plan. Be sure to ask your employer what deductions they take.

When you start working in Canada, one thing that may come as a surprise is that your salary (the annual gross amount you are paid) is not the same as the net salary amount that gets deposited into your bank account. This is because your employer is required to make certain deductions from your gross pay. The difference between what you make and what you keep can be around 25 to 35 per cent.

If you’re looking at a recent pay statement (also called a pay stub) and wondering where all those deductions go, this guide is for you.

Your guide to pay stubs in Canada

Your pay stub is your statement of earnings and shows the difference between what you get paid to do your job and how much money you get to take home. It can be shocking if you’re not used to working in a country with high tax rates. If you’re looking at your latest pay stub and wondering where all the money went, this guide will help you understand where your money goes and what you get to keep.

Gross pay

The word ‘gross’ means total. Your gross pay is based on your total annual salary divided by the number of pay periods. For example, if your annual salary is $54,000 and you’re paid monthly, your gross pay is $4,500 per month ($54,000 divided by 12).

Watch the 3-minute CRA video all about your pay stub.

Deductions

The word ‘deduction’ means to take away, or ‘deduct’ something. In the case of your paycheque, money can be deducted for lots of reasons. The most common are:

Federal income tax

This is a tax you pay to the federal government of Canada. It’s a progressive tax, meaning you pay 15 per cent on the first $55,868 of income but 20.5 percent on every dollar over that amount, up to $111,733.

Here’s an example of a person who makes $54,000/year:

Gross pay $54,000

$53,359 taxed at 15% $8,003.85

$641 taxed at 20.5% $128.20

Total federal tax deducted is $8,132.05 (this does not include provincial or territorial tax)

Provincial or territorial income tax

In addition to federal tax, every Canadian pays an additional amount directly to the province or territory where they live. These amounts are typically higher than federal taxes and vary from province to province. In addition, the amount of tax that gets deducted increases as your income goes up.

Canada Pension Plan (CPP)

CPP is Canada’s national pension plan. You pay a mandatory amount of about 5.95 per cent of your gross pay and your employer pays the same amount. You’ll see your CPP deduction amount on your paycheque. To learn more about CPP, check out the Government of Canada website.

Payments are automatic

Whether you work full or part-time, it’s your employer’s job to submit your tax payments, as well as CPP and EI contributions to the government.

Employment insurance (EI)

EI is a form of insurance that provides income to workers in the event of:

Involuntary job loss/ job loss through no choice of their own
Life events like illness or pregnancy

Employers deduct premiums for this insurance on every paycheque, and workers only qualify for EI if they’ve paid into the program. In 2023 the premium rate is 1.63%.

Benefits

If your employer offers benefits such as life insurance, health care that isn’t covered by the government, or a group savings plan, both you and your employer may contribute to these costs. You’ll see how much you contribute from each paycheque plus any contributions your employer makes on your behalf.

Union/Professional dues

These are fees for membership in a union or professional organization. Most employers will pay for union or professional dues on your behalf. Be sure to ask your employer about their policy.

Pension Plans

Companies of all sizes can offer private pension plans that let you save for retirement by having money deducted from each paycheque. Many companies will match your contribution so be sure to ask if your company provides one. It’s an easy way to start building your savings.

Registered Retirement Savings Plans (RRSPs)

The RRSP is a retirement saving plan created by the federal government to help Canadians save for retirement faster by deferring taxes. Some employee benefit plans allow you to contribute to an RRSP with ’before tax’ dollars. As part of the interview process, it’s not uncommon to ask potential employers about their employee savings plan.

Equipment/Uniform Rentals

A company may require employees to use specialized equipment or wear a uniform. If the cost comes out of your pay, it must be shown paycheque stub.

Net pay

The word ‘net’ describes what’s left of your gross pay after money is taken off your paycheque to cover the cost of ‘deductions’. This is yours to spend, save, or invest any way you want to.

Year to date (YTD)

At any point in the year, the year-to-date column shows the total amount that you have received in gross pay plus what you’ve contributed so far to deductions. Use this information to build your own budget (monthly or annually) and track where your money goes.

Now you know

Understanding your paycheque helps you see where your money is going and how much you can expect to keep over a month or a year. With this information, you can make better plans to budget for the things you need and avoid having to take on additional debt. For more information on how to gain financial stability in Canada, check out this 4-minute read.

Disclaimer: This content is intended for informational purposes only and does not constitute financial advice on any subject matter.