This article provides information on how income taxes are calculated in Rise Payroll and why the tax calculations may differ from other tax calculators provided by the Canada Revenue Agency (CRA).
Q: Is the method used for tax calculations in Rise accepted by the CRA?
A: Yes, the CRA accepts different tax calculation methods (as outlined further down in this article). Canadian payroll tax calculations are very complex and take quite a few factors into account. The tax calculations you see in Rise are correct and accepted by the CRA.
Q: Why would tax calculations in Rise differ from the online payroll calculator published by the CRA?
A: The CRA Payroll Deductions Online Calculator (PDOC) uses a simple tax calculation method. It doesn’t take prior history into account and is only an 'estimate' based on the current pay period amounts, multiplied out by the number of pay periods in the year.
For the taxes paid on an employee’s periodic income—which is money paid regularly to the employee such as their hourly or salary wage—Rise Payroll uses the same method as the PDOC to estimate an employee’s annual income. The current pay period amounts are multiplied by the number of pay periods in the year.
CRA’s year-to-date tax calculation method
There are two sections (the bonus tax calculation and the CPP & EI tax credit calculation) where the CRA has an optional method of estimating annual amounts. This method is known as the year-to-date method. With this method, instead of simply estimating an annual amount based only on the current pay period amount, the employee’s actual year-to-date balances are used in the calculation. Only the future portion of the annual amount is estimated based on the current pay period amount.
As year-to-date can be more accurate than the regular method used by PDOC, Rise Payroll uses this method in both areas where it’s available. The year-to-date option is available in:
- The bonus tax calculation to estimate an employee’s annual income. This is the tax calculation used for non-regular (non-periodic) income, such as a one-time bonus.
- The CPP & EI tax credit calculation to estimate an employee’s annual contribution to CPP and EI.
Any employee who contributes to CPP and EI is eligible for a tax credit that’s a percentage of their estimated annual contributions. This tax credit is applied in both the regular (periodic) tax calculation and the bonus tax calculation.
For Quebec employees, the tax credit includes their QPP, EI, and QPIP contributions.
There is no CRA year-to-date method available in the regular (periodic) income tax calculation, which is why that calculation is the same in PDOC and Rise Payroll.
Q: Why would the tax calculations for the same employee differ from a pay run done earlier in the year versus a pay run done later in the year?
A: Taxes calculated for the first pay period of the year will generally be the same in Rise Payroll and PDOC, since the employee will have no year-to-date balances and the calculations end up being essentially the same. For employees whose taxable earnings and benefits vary from pay period to pay period, there will be more differences as the year progresses.
If an employee has regular periodic income and benefits that remain the same for all pay periods in the year—and they have no non-periodic income such as a one-time bonus—their taxes will remain the same from pay period to pay period.
If an employee has occasional non-periodic income, such as a bonus or non-regular commission, where taxes are calculated using the bonus tax calculation method, then Rise Payroll will tend to calculate those taxes more accurately than PDOC as Rise Payroll will use the employee’s actual year-to-date balances when estimating the employee’s annual income. As the year progresses, the annual income calculation becomes increasingly accurate, as more of the amount will come from the employee’s year-to-date balances rather than from an estimate based on the current pay period amount.
If an employee has no non-periodic income and has only regular, periodic income—but the periodic income and benefits vary from pay period to pay period—their taxes may still be more accurate in Rise Payroll than PDOC, since the CPP & EI tax credit takes the employee’s year-to-date balances into account. So, even though the annual income estimate will be the same in Rise Payroll and PDOC, the CPP & EI tax calculation amount may be more accurate in Rise Payroll.
Q: Why would the tax calculations for a new hire differ from an existing employee with the same pay?
A: Taxes calculated mid-year for an existing employee would be different from the taxes calculated for a new hire with the same pay, since an existing employee would have year-to-date balances to inform the calculations whereas the new hire would not.
Q: Why doesn't a new hire with no history match the CRA calculations?
A: Since Rise Payroll uses the year-to-date method for both the bonus tax calculation and the CPP & EI tax credit, a new hire with no history might not match the CRA calculations because the employee’s year-to-date balances are used in those calculations. If an employee is hired mid-year and has no taxable, pensionable, or insurable year-to-date balances, the amounts calculated by Rise Payroll would be different from those calculated by PDOC.
The estimated amount in Rise Payroll would only include the future amount based on the current pay period. In PDOC, it would take the current pay period amount and multiply that by the total number of pay periods in the year.
You would only be able to compare taxes for employees that started at the same time and have the same year-to-date balances, benefits/deductions, etc. Otherwise, you can expect differences.
The following link further explains the CRA Tax Calculations. At the bottom of the site below, click the link under Effective January 1, 2019, to find the PDF. The method Rise uses is Option 1 - Tax Formulas - Chapter 4.