On November 15, 2024, the Canada Revenue Agency released the T4127 - January Payroll Deductions Formulas Guide 120th Edition.
The T4127 guide is used by payroll software providers or companies that develop their own in-house payroll solutions. This guide has the formulas employers need to determine federal, provincial (except Quebec), and territorial income taxes, Canada Pension Plan (CPP) contributions, and employment insurance (EI) premium deductions. The formulas used in this guide to calculate statutory deductions have been approved for the Income Tax Act, the Canada Pension Plan, and the Employment Insurance Act, as well as their related regulations and any amendments proposed to the acts.
The guide includes the following upcoming changes:
Indexing – Based on the changes to the consumer price index (CPI).
Federal
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Second additional Canada Pension (CPP2): Starting in 2025, the Year’s Additional Maximum Pensionable Earnings (YAMPE) will increase to approximately 14 per cent above the Year’s Maximum Pensionable Earnings (YMPE), up from about 7 per cent in 2024.
As a result, the pensionable earnings between the YMPE and YAMPE will be subject to CPP2 contributions.
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The increase to the Federal Basic Personal Amount (BPA) to $16,129.
Alberta - The personal income tax amounts have been raised by 2% for 2025.
Manitoba - Starting in 2025, Manitoba basic personal amount (BPAMB) will be gradually reduced for individuals with net income between $200,000 and $400,000. The BPAMB will be reduced to zero for individuals earning a net income of $400,000 and above. This may cause these employees’ personal tax credits for the year to change, which could result in employees submitting a new TD1MB.
Nova Scotia - For 2025 and subsequent taxation years, the Nova Scotia budget proposes to introduce annual indexing to the provincial personal income tax system, impacting the income tax brackets and certain non-refundable tax credits, including the basic personal amount, the spouse or common-law partner amount, the amount for an eligible dependant, the age amount, and the amount for infirm dependants age 18 or older.
Prince Edward Island - The legislated basic personal amount has increased from $13,500 to $14,250. Additionally, starting in 2025, the first three tax brackets have been adjusted, along with revised tax rates across all five brackets, as follows:
- Income up to $33,328: Tax rate is 9.50 per cent
- Income from $33,328 to $64,656: Tax rate is 13.47 per cent
- Income from $64,656 to $105,000: Tax rate is 16.60 per cent
- Income from $105,000 to $140,000: Tax rate is 17.62 per cent
- Income over $140,000: Tax rate is 19.00 per cent
Employers that develop in-house payroll solutions should:
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Ensure they have the most recent version of the T4127 guide, which outlines the current payroll deduction formulas.
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Update their Payroll Software according to the updated formulas.
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Train Payroll Staff and educate their payroll personnel on the changes in the T4127 guide to ensure accurate application of the new formulas.
By following these steps, employers can effectively implement the T4127 guide and ensure accurate payroll deductions in line with the CRA requirements.