Calculating deductions on retroactive pay increasesMake sure to use income tax rates in effect in the year you are making the paymentBy Annie Chong10/03/2013|Canadian Payroll Reporter|Last Updated: 10/03/2013 Question: We are paying a retroactive pay increase to our employees as part of a new collective agreement. The pay raise actually applies to 2011. To calculate income tax source deductions, do I use the rates from 2011 or now? Alternatively, can I use the lump sum tax rates? Answer: When paying a retroactive pay increase from a previous year, use the income tax rates in effect in the year you are making the payment.To calculate income tax source deductions from a retroactive pay increase, you must first determine whether the employee’s total earnings for the year, including the retroactive pay increase, are more than $5,000.To do this, add up all the employee’s earnings for the year and then subtract registered pension plan (RPP) contributions, retirement compensation arrangement contributions, registered retirement savings plan (RRSP) contributions (as long as there is reasonable grounds to believe the employee can make the contribution), union dues, amounts for living in a prescribed zone and amounts that have been authorized by a Canada Revenue Agency (CRA) tax services office. To Read the Full Story, Subscribe or Sign In Remember Me Forgot Password If you are a current Subscriber, please click here to set-up or update your login information.