Pay Deductions in Canada | Your Net Pay & Gross Pay

Pay deductions can often be confusing and can come as an unpleasant surprise if you weren’t expecting them. Canadian workers have quite a few pay deductions that you should be aware of. Some of these are mandatory, like taxes, while others are voluntary, like union dues. These deductions make the difference between net pay and gross pay. Many pay deductions are there to help you in the future. However, you won’t be able to take advantage of the extra money if you do not know where it is and how you can access it.

Getting Your First Job in Canada

After you accept a job in Canada, you will receive a job offer letter. This is an exciting time! Your offer letter, also known as an employment letter, will include:

• Annual pay

• Method of payment and how often you will be paid

• Work schedule

• Job description and duties

• Workplace rules and policies

• Other employment conditions such as benefits and commissions.

The amount of money that is shown in the letter will not be the same amount that you will receive. This is because the amount on the letter is your gross pay.

Understanding Net Pay and Gross Pay

Understanding the difference between net and gross pay is important to put your money to the best use. Fortunately, net pay and gross pay are quite easy to understand.

Gross pay: the money your employer pays you before mandatory and voluntary deductions.

Net pay: the amount of money you receive after deductions.

Each time your employer pays you, they must deduct a certain amount from your paycheque. The deductions depend on:

• The province you live in (each province has its own income tax rate)

• What type of job

• How much you are paid

• What programs you are part of (pension plans, Unions, etc.)

However, when an employer tells you how much you are going to be paid they are talking about gross pay. Gross pay is your pay before deductions. It is not actually what you are going to receive. Your gross pay includes bonuses, commissions, and overtime pay.

From your gross pay, your employer will deduct the following:

• Taxes

• Canada Pension Plan (CPP) and

• Employment Insurance (EI).

These deductions are not lost, however. Taxes pay for many public and social services in Canada. CPP and EI will also benefit you in the future when you retire or if you lose your job.

After all the deductions, the remaining money is your net pay. This is the amount you will take home. Avoid confusing your gross and net pay because you need to budget your net pay, not your gross pay.

Your pay stub, or the letter you will receive with every pay, will have your gross and net pay. Your gross pay is listed at the top of the pay stub, followed by any deductions. At the bottom, you will find your net pay. This is the amount of money you will receive for that payment term.

Now let’s look at different pay deductions and how they affect your pay.

Voluntary Pay Deductions, Net Pay, and Gross Pay

Your employer must deduct any voluntary pay deductions before they deduct any income tax. These deductions will affect your net pay. Some examples of voluntary deductions include:

• Union dues

• Uniforms, Meals, Equipment (anything you buy from your workplace)

• Automated deposits that you set up with your bank.

Not every paycheque will have these deductions because you will choose whether or not you want them. Whenever you buy anything from your workplace, you will either have to pay on the spot or the amount will be deducted from your pay. If you are part of a trade union, your union dues will also be deducted from your paycheque.

Any automated deposits you arrange will also be deducted from your paycheque. These deposits may be linked to your savings account or automatic contributions to a Registered Retirement Savings Plan (RRSP).

Depending on your job, you could also have other deductions as well. Review your pay stub each month to ensure the deductions are correct. If you see a deduction you don’t recognize, talk to your employer about it. Keep in mind this money is not taxable income. You pay taxes based on the income after deductions.

A good way to save for the future is to set up automated deposits into your savings account or a Registered Retirement Savings Plan (RRSP). These automatic deposits contribute a portion of your paycheck into whatever account you want them to.

Saving for Your Future in Canada

You can refer to the 50/30/20 budgeting rule if you’re unsure how to budget your money. The rule recommends you put at least 20% of your pay toward savings. This way, you will have most of your pay for fixed expenses and entertainment while building savings over time.

If you plan to pay for your child’s post-secondary education, you can also open a Registered Education Savings Plan (RESP). An RESP is a great way to save for post-secondary education because the government will also contribute money to your RESP for every dollar you contribute. You can set up another automated deposit for this.

The best financial advice is to stick to a budget and automated pay deductions are no exception. Divide your money properly and have enough to pay for basic expenses before you set up any automated deposits. However, it may be wiser to make manual deposits if your income is not reliable or low.

WRITTEN BY

Zain Usmani

Writer, Prepare for Canada

My name is Zain Usmani and I am a freelance content writer who currently resides in Mississauga, Ontario. I immigrated from Pakistan to Canada 5 years ago and have lived in many cities ever since. I have lived in Calgary AB, Edmonton AB, Regina SK, London ON, and Mississauga ON, while visiting over 40 Canadian cities and towns. I have a great passion for writing and I love helping people through it.

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