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Option 1 – Normal tax calculation

 

The normal formula contained in this option determines the federal and provincial or territorial tax

deductions on salary, wages, taxable benefits, pension income, commissions, and other periodic

payments. The normal formula can also be used to calculate the tax on a bonus or other

non-periodic payment.

 

Outline of Option 1

 

In general, the Option 1 steps are as follows:

1. Determine the net taxable income for the pay period (remuneration minus allowable

deductions) and multiply it by the number of pay periods in the year to get an estimated

annual taxable income amount.

2. Calculate the basic federal tax on the estimated annual taxable income, after allowable

federal personal tax credits.

3. Calculate the annual federal tax payable.

4. Calculate the basic provincial or territorial tax on the estimated annual taxable income, after

allowable provincial or territorial personal tax credits.

5. Calculate the annual provincial or territorial tax deduction.

6. Add the federal and provincial or territorial tax and divide the result by the number of pay

periods to find the estimated federal and provincial or territorial tax deductions for a pay

period.

 

Option 2 – Tax formula based on cumulative averaging

 

Option 2 formulas are intended for employees whose remuneration fluctuates considerably from

one pay period to the next. In the Option 2 formulas, the amount of tax to be deducted is based

on the projected annual taxable income (including bonuses) compared to the amount of tax

previously deducted in the year. Option 2 works well for employees who are employed for a full

calendar year. If the employee’s income is relatively stable for each pay period, there will not be a

significant difference in the tax deductions with Option 2 compared to Option 1.

The following sections will explain in detail how Option 2 works. The acronym YTD used in this

option means year-to-date , and will include payments or deductions for the current year, but will

exclude the payment payable now and the deductions for the current pay period.

 

Calculation of income

 

In Option 2, the actual year-to-date income plus the current income is projected over the

remaining pay periods in the year. For example, an employee received $20,000 total in 20

previous pay periods and $500 in the current pay period, and there are 5 pay periods remaining.

The projected income for the year using Option 2 will be $25,380.95 [($20,000 + $500) × 26 / 21].

When you calculate tax in Option 2, you calculate the tax on the projected income for the year,

then find the tax amount that is proportional to the number of pay periods that have actually

occurred (including the current pay period). Compare the result to the tax actually deducted in the

year-to-date. The difference is the tax payable on the current income.

Continuing the above example, if the total federal and provincial or territorial tax on $25,380.95

is $3,560.17, the proportional year-to-date tax is $2,875.52 ($3,560.17 / 26 × 21.) If the total tax

deducted year-to-date is $2,736.40, the tax on the current income of $500 is $139.12

($2,875.52 – $2,736.40.) The tax values used in this example are fictitious.