Understanding Your Canadian Pay Stub: CPP, EI, and Income Tax Deductions Explained

The first Canadian pay stub most people look at raises the same question: where did the rest of it go? The gap between gross pay and what actually lands in your account isn't random — it's three specific, calculable deductions, and understanding each one means you can actually verify your own pay stub instead of just trusting it.

The three deductions on almost every pay stub

Nearly every employee pay stub in Canada includes the same three mandatory deductions, in the same order they're typically listed:

1. CPP (Canada Pension Plan) — funds your future retirement pension.
2. EI (Employment Insurance) — funds income support if you lose your job, plus parental, sickness, and caregiving benefits.
3. Income tax — federal and provincial tax withheld in advance, based on your estimated annual income.

Each one uses a specific formula, not a flat guess — which means each one can be verified.

CPP: what it actually is and how it's calculated

CPP isn't a tax in the sense that it disappears — it's building the pension you become eligible to collect starting as early as age 60 (with permanent reductions for starting early, and permanent increases for delaying past 65). Every dollar contributed is tracked against your own future entitlement.

EI: what it actually is and how it's calculated

EI funds temporary income support if you lose your job through no fault of your own, as well as maternity, parental, sickness, and compassionate-care benefits. Eligibility for actually collecting EI depends on insurable hours worked and your region's unemployment rate — paying into it doesn't automatically guarantee a specific benefit amount if you ever need to claim it.

Income tax withholding: why it's different from the other two

CPP and EI use fixed percentages and hard annual caps that apply identically to every employee earning above them (outside Quebec, which has its own QPP and reduced EI rate). Income tax withholding is more complicated: your employer estimates your annual income tax based on what that specific pay period's earnings would total if repeated all year, then withholds a proportional share each pay period, adjusted by the personal tax credits you've claimed on your TD1 form.

This is why a bonus or a period of overtime can noticeably increase how much tax gets withheld from that particular cheque — the system assumes, for calculation purposes, you'll earn at that higher rate all year. It's a withholding-timing effect, not a different actual tax rate on that income, and it evens out correctly when you file your annual tax return — either as a refund of the excess withheld, or a smaller balance owing than it would otherwise be.

A worked example

Fatima earns $65,000/year, paid biweekly (26 pay periods), working in Ontario.

• Gross pay per period: $65,000 ÷ 26 = $2,500
• CPP deducted per period: roughly $2,500 minus a prorated exemption, at 5.95% — approximately $140/period (her total CPP for the year, properly calculated against the full $3,500 annual exemption and $74,600 cap, comes to roughly $3,660 for the year, since her earnings don't reach the CPP2 threshold at all)
• EI deducted per period: $2,500 × 1.63% = $40.75/period (continuing until her cumulative insurable earnings hit the $68,900 cap, which at this income she won't reach within the year)
• Income tax withheld per period: varies by province and claimed credits, but commonly works out to somewhere in the 15–20% range of gross pay at this income level once both federal and Ontario tax are combined — call it roughly $380–$420/period as a rough, illustrative range, not a precise calculation

Added together, Fatima's biweekly deductions commonly total somewhere around $560–$600, leaving a net deposit noticeably below her $2,500 gross — explained entirely by these three line items, not by an error.

How to actually check your own pay stub

1. Confirm your gross pay matches your agreed salary or hourly rate times hours worked for that period.
2. Recalculate CPP using 5.95% on earnings above the prorated exemption, checking your year-to-date CPP deducted against the $4,230.45 annual maximum (or $4,646.45 including CPP2, if your income crosses $74,600).
3. Recalculate EI at 1.63% of gross pay for that period, checking year-to-date EI against the $1,123.07 annual maximum.
4. Use the CRA's online payroll deductions calculator to verify the income tax withholding matches what it should be for your income, province, and claimed credits.
5. Watch for CPP and EI stopping partway through the year once you hit the annual maximums — this is normal and means more net pay in your final pay periods of the year, not an error.

Common mistakes

• Assuming deductions are wrong just because take-home pay feels low. Three separate mandatory deductions, each following published formulas, typically explain the entire gap between gross and net pay.
• Not noticing when CPP and EI stop deducting late in the year. Once you hit the annual maximum for either, deductions stop for the rest of the year — a real, expected increase in take-home pay, not a payroll mistake.
• Confusing a large tax withholding on a bonus cheque with a higher actual tax rate on that income. It's a withholding-calculation effect that corrects itself at tax-filing time.
• Not checking a new job's pay stub against expectations in the first pay period. Payroll setup errors do happen — catching one early, using the checks above, is far easier than correcting months of accumulated error later.

Sources

• CPP contribution rates, maximums and exemptions — Canada Revenue Agency
• EI premium rates and maximums — Canada Revenue Agency
• Payroll Deductions Online Calculator — Canada Revenue Agency

This article is for general educational purposes only and does not constitute tax or financial advice. CPP, EI, and tax figures reflect 2026 rates and are subject to annual change — confirm current rates with the CRA, and speak with a licensed financial professional about your specific situation.

What to do next

If this is your first time budgeting against net rather than gross pay, Building a Budget You Will Actually Stick To walks through exactly that distinction with worked examples at several income levels. For what those CPP contributions are actually building toward, see CPP and OAS, Explained.