On May 21, 2026, the Canada Revenue Agency released the T4127 – July Payroll Deductions Formulas Guide 123rd Edition.
The T4127 guide helps payroll software providers and companies developing in-house payroll solutions. It contains formulas for determining federal, provincial (excluding Quebec), and territorial income taxes, Canada Pension Plan (CPP) contributions, and employment insurance (EI) premium deductions. These formulas are developed as interpretations of the Income Tax Act, the Canada Pension Plan, and the Employment Insurance Act, along with their regulations and proposed amendments.
The guide includes the following upcoming changes:
British Columbia
Effective January 1, 2026, the lowest personal income tax rate increased from 5.06% to 5.60% for 2026 and subsequent years. Since employers used the lower rate for the first six months of the year, a prorated rate of 6.14% will apply for the remaining six months, commencing with the first payroll in July 2026.
In addition, the basic reduction amount increased from $562 to $690 for 2026 (originally indexed to $575 effective January 1, 2026). A prorated basic reduction of $805 will apply for the remaining six months, commencing with the first payroll in July.
Newfoundland and Labrador
Effective January 1, 2026, the Basic Personal Amount (BPA) increased from $11,188 to $13,094. Since employees received the lower BPA for the first six months of the year, a prorated BPA of $15,000 will apply for the remaining six months, commencing with the first payroll in July 2026.
If an employee submitted a TD1NL prior to July 1, 2026, with the lower BPA, employers do not need a new TD1NL to change it to the prorated amount.
Prince Edward Island
Effective January 1st,2026 and subsequent years, a new income tax bracket of 20% applies on taxable income above $200,000. Since employers used a lower rate for the first six months of the year, a prorated rate of 21% will apply for the remaining six months, commencing with the first payroll in July 2026.
Payroll providers and employers using in-house payroll solutions should:
- Obtain the latest T4127 guide;
- Update payroll software accordingly;
- Communicate and train staff on the changes; and
- Notify employees of the tax changes impacting their net pay, including the prorated rates and credits effective July 2026.
This ensures accurate payroll deductions and compliance with the CRA requirements.