The Canada Revenue Agency has released updated payroll deduction formulas that employers must begin using with their first payroll in July 2026.
The 123rd edition of the T4127 Payroll Deductions Formulas includes mid-year provincial tax changes affecting how much income tax is withheld from some employees.
Not every Canadian worker will see a difference. The impact depends on the province of employment, taxable income, personal credits and other information provided through federal and provincial TD1 forms.
Why CRA Updates Payroll Mid-Year
The CRA publishes payroll formulas twice annually, with editions effective January 1 and July 1.
The January version includes tax rules available near the end of the previous year. Provincial budgets released during the spring may introduce additional changes that require updated withholding calculations.
When a tax change applies retroactively to January 1, the CRA may use prorated rates or credits between July and December. This corrects amounts that were over-withheld or under-withheld during the first six months.
British Columbia Workers May Pay More Tax
British Columbia workers are among those most likely to notice a change.
The province increased its lowest personal income tax rate from 5.06% to 5.60% for 2026 and later years. The rate applies to the first $50,363 of taxable income.
Because employers used the old rate between January and June, a prorated rate of 6.14% will apply from July through December. This may produce slightly higher provincial deductions and lower take-home pay during the second half of 2026.
British Columbia also increased its basic tax reduction, partially offsetting the rate increase for eligible lower-income workers. The CRA’s July formulas explain the prorated adjustment.
Newfoundland And Labrador Credits Increase
Newfoundland and Labrador increased its basic personal amount from $11,188 to $13,094 for 2026.
A prorated amount of $15,000 will be used during the final six months to compensate for the lower credit applied earlier in the year.
This change may reduce provincial income tax deductions for eligible workers, potentially increasing their net pay.
Employees who previously submitted a TD1NL using the lower basic amount generally do not need to provide a replacement form solely for this adjustment.
High Earners In PEI Face New Bracket
Prince Edward Island introduced a new 20% provincial income tax bracket for taxable income above $200,000.
Because the change applies to the entire 2026 tax year, a prorated rate of 21% will be used for affected income during the final six months.
As a result, higher-income PEI employees may notice increased provincial tax withholding beginning with their first July paycheque.
Most Provinces Have No Mid-Year Change
The CRA reported no July payroll formula changes for Alberta, Manitoba, New Brunswick, Nova Scotia, Ontario, Saskatchewan, Yukon, Nunavut or the Northwest Territories.
Workers in those regions may still see changes because of overtime, bonuses, commissions, salary increases or updated TD1 information.
Quebec employers follow separate provincial payroll guidance issued by Revenu Québec.
CPP And EI Rates Remain Unchanged
Canada Pension Plan contribution rates and Employment Insurance premiums did not change on July 1.
For 2026, employees outside Quebec continue contributing 5.95% on applicable base CPP pensionable earnings, with CPP2 applying to earnings within the additional range.
The EI employee premium remains $1.63 per $100 of insurable earnings outside Quebec.
Some workers may see CPP or EI deductions stop later in the year after reaching their annual maximums. That is separate from the July payroll update.
What Employers And Workers Should Do
Employers should confirm that payroll software includes the July T4127 formulas and the correct provincial T4032 tables.
Workers can compare their final June pay stub with their first July pay stub. If gross earnings remain unchanged but income tax differs, the updated formulas may be responsible.
The CRA’s Payroll Deductions Online Calculator can also estimate expected deductions using a July pay date.
The July 1 CRA payroll update will not affect every Canadian equally. British Columbia workers may experience higher withholding, while many Newfoundland and Labrador employees could receive a small increase in take-home pay.
High-income PEI workers may also face additional deductions. Reviewing July pay stubs will help employees identify and understand any changes.