As an employer, it is your duty to ensure that your employees are correctly paid. If you’re an employer in Canada, this means that you must comply with the requirements set forth by the CRA (Canada Revenue Agency) and must make and remit the correct payroll deductions. Not sure how to do payroll in Canada? Here’s a guide!
An Overview of Payroll in Canada
When it comes to employers in Canada, running payroll involves the following five steps:
- Opening and operating a payroll account with the CRA;
- Collecting required employee information, such as their Social Insurance Number. You will also need a completed provincial and federal TD-1 form.
- Make the correct payroll deductions from the employees’ pay in every pay period.
- Remit the payroll deduction, employment insurance (EI) premiums, and your share of the Canada Pension Plan (CPP) contributions to the CRA.
- Report the deductions and income of each employee on the appropriate T4A or T4 slip. File an information return on or before the last day of February of the following year.
Let’s look at each of these steps in detail.
Step 1: Open the payroll account.
To remit payroll deductions to the CRA, you first need to have a CRA payroll deductions program account. If you have a business number (BN) already and have registered for other CRA program accounts in the past, you can add a payroll deductions account to the existing program accounts.
Getting a business number in Canada
If you don’t have a business number, you must get a business number before you add a payroll account. There are three ways to get a business number:
- Register online with the business registration online service;
- Call the CRA at 1-800-959-5525;
- Fax or mail a completed Form RC1 to the nearest tax centre or tax service office.
Once you get a business number, you can register yourself for program accounts via the business registration online service. This includes payroll deductions as well.
Step 2: Collect required employee information.
When hiring an employee, you must examine each new hire’s SIN card and record the employee’s SIN and name exactly as written on the card. NOTE: If the SIN starts with a “9,” that indicates that the worker is not a Canadian citizen or permanent resident. You cannot hire these individuals unless you have a specific authorization to do so from Immigration, Refugees and Citizenship Canada.
Your employees must fill out the appropriate provincial and federal Form TD1 (Personal Tax Credits Return). This form determines the amount of tax to be deducted from the employee’s income.
Step 3: Make the correct deductions.
Before making any deductions, make sure you add any taxable benefits to your employees’ pay. If you provide anything else to the employee in addition to the cash wage — such as low-interest loans, parking, board, lodging, or permission to use the company car — these are counted as taxable benefits.
These taxable benefits must be added to the employee’s income for every pay period before making payroll deductions. The total income will then determine the amount subject to income tax deductions, EI premiums, and CPP contributions.
Once you account for all the benefits and taxable wages, you can now move on to making your Canadian payroll deductions. Employers must make the following deductions from the employees’ pay:
For this, it is best to use the territorial or provincial tables for the territory or province where the employee works. Perhaps the easiest way to calculate income tax is to use the CRA’s online calculator, which can also calculate the other payroll deductions you must make.
Generally, you must deduct CPP contributions from an employee’s pay if the worker is:
- between 18 and 69 years of age;
- not disabled;
- not receiving any QPP (Quebec Pension Plan) or CPP pension;
- In pensionable employment.
You can find other useful information, such as maximums, contribution rates, and exemptions on CRA’s official website.
Usually, you must deduct EI premiums for every dollar of an employee’s insurable earnings, up to the yearly maximum. Your employer contribution to EI premiums is 1.4 times the EI premium that is withheld for every employee. There is no maximum or minimum age for deducting EI premiums. Once your employee EI deductions reach the annual maximum, you no longer need to deduct them.
Note that some payments and benefits that you provide to your employees are not subject to EI. Plus, as a Canadian employer, there might be certain situations that affect EI deductions. Information on all such situations can be found on CRA’s website.
You may also have to make some employee deductions that are specific only to your organization. These include retirement plans, life insurance, and extended health benefits.
If you’re unsure of the amount of EI you must deduct for a pay period, visit the online calculator on the CRA’s website.
Step 4: Remit the deductions to the CRA
When it comes to remitting the deductions, you can do so electronically or with paper remittance vouchers. If you use paper, then you will receive the statements of accounts via email. If you choose to remit electronically, you can view your transactions and statements via your online My Business Account.
New employers are classified as regular remitters. You must remit your deductions so that the CRA receives them before the 15th of the following month. Later, after you establish a remittance history, you can be reclassified as an accelerated or quarterly remitter. You will then have to complete less paperwork.
Step 5: Complete information returns and T4 slips
The last step is to complete a T4 slip for each employee and fill out the T4 summary form. You must file T4 information returns and give T4 slips to employees on or before the last day of February.
You can fill out the T4 slips electronically with CRA’s T4 web form application, or use an online PDF. Similarly, you can file the T4 summary form electronically or in paper form. For the latter, you will have to send the original summary along with the related T4 slips to Jonquière Tax Centre.
When do you have to submit the remittance?
The remittance submission schedule for your payroll deductions depends on your business’s average monthly withholding amount (AMWA), or the monthly average of the total payroll yearly deductions paid to the CRA.
Your remittance classification and the due dates also depend on the yearly AMWA of your company.
You are classified as a new remitter if:
- You’re a new employer or have never made remittance payments ever before;
- The due date for your remittances is the 15th of the following month for which the deductions were made.
You are classified as a regular remitter if:
- You’re a new employer, and your AMWA history is less than two years, or your two-year AMWA is less than $25,000.
- The due date for your remittances is also the 15th of the following month for which you made deductions.
You are classified as an accelerated remitter if:
- Your two-year AMWA ranges from $25,000 to $99,999.99. In this case, you are a threshold one accelerated remitter, and the remittances for the payroll processed till the 15th of the month are due on the 25th of the same month. For payrolls processed on the 16th or later, the due date is the 10th of the following month.
- Your two-year AMWA is more than $100,000, in which case you are a threshold two accelerated remitter. In this case, the due date for the processed payroll is the third business day, excluding the weekend and public holidays, after the end of these periods:
- 1st-7th of the month;
- 8th-14th of the month;
- 15th-21st of the month;
- 22nd-last day of the month.
You are classified as a quarterly remitter if:
- You’re a small business owner with a two-year AMWA of below $3,000 and have an ideal compliance history with the CRA. In this case, your remittances are due on or before or the 15th day of April, July, October, and January for the total payrolls processed in the previous quarter.
All business records, including those related to payroll, should be kept at your business place or at your residence in the country, unless you have permission from the CRA to keep them somewhere else. Also, remember that the business records, along with supporting documents, must be kept for six years.
Failure to comply with the Canadian payroll requirements can result in penalties ranging from $1,000 to $25,000, imprisonment of up to a year, or both.
Common payroll remittance errors
It is common to have deduction errors while calculating payroll remittances. For instance, you might find that you are over- or under-remitted. In such cases, it is crucial that you alert the CRA and rectify the discrepancies as soon as you can.
If you under-remit, then you can just remit the remaining amount to the CRA instantly and mention the remitting periods that they apply to. The CRA may charge interest or a late remittance penalty if you are past the due date.
If you over-remitted, you may reduce the next remittance for the current year by the amount you over-remitted. If your over-remittance was for a prior year, you may ask for a refund or transfer of credit.