Payroll processing in Canada

Before you hire an employee, you need to understand your obligations from the tax perspective as well as other obligations. The following major items are highlighted below that you need to be aware of.

Employment Standard of Canada
The minimum wage in each province
Overtime
Processing payroll, deductions, and remittances
WSIB
EHT
T4
ROE

Processing payroll, deductions, and remittances

Every employer is responsible to prepare a payslip for each pay period and provide a copy to the employee. Each payslip must show the gross wages and all the applicable deductions for the period and year to date. The following requirements will apply.

CPP – CPP is the Canadian Pension Plan to which every employee contributes. The employer needs to contribute an equal amount. The employer is responsible for deducting the CPP from each pay cheque of the employee. There is a basic exemption limit of the gross salary and wages. The employer need not deduct CPP if the employer estimates that the employee’s gross salary and wages will not exceed this basic exemption limit in a calendar year. In the year 2021, an employee does not need to contribute to CPP if his gross salary and wages are below $3,500.00, and accordingly, the employer is not obligated to deduct and contribute. Also, there is an upper limit on the CPP contribution by an employee in a calendar year. In 2021 an employee need not contribute to his/her CPP exceeding $3,166.45 in a Calendar year. The employer is obligated to stop deducting CPP from the employee pay cheque when the employee’s CPP contribution has reached the maximum limit in a calendar year.

EI - is the Employment Insurance Premium to which every employee contributes. The employer needs to contribute 1.4 times of the amount contributed by the employee. The employer is responsible for deducting the EI from each pay cheque of the employee. There is an upper limit on the EI contribution by an employee in a calendar year. In 2021 an employee need not contribute to his/her EI exceeding $889.54 in a Calendar year. The employer is obligated to stop deducting EI from the employee pay cheque when the employee’s EI contribution has reached the maximum limit in a calendar year.

Note: Shareholders and directors need not contribute EI premium.

Tax Deduction – The employer is responsible for deducting the federal and provincial income tax from each pay cheque of the employee. The rate of federal income tax deduction remains the same all over Canada. However, the provincial income tax deduction rate depends on the province in which the employee is employed.

Note: You should obtain a signed copy of TD1 Federal and TD1 Provincial forms to set up proper tax deductions for your employee.

Vacation pay – You must give at least two weeks of paid vacation, or instead, you can pay 4% of the gross wages to your employee. As per the ministry of labour, you need to state the vacation pay separately on each paystub of the employee.

Union dues – In certain industries, there is an employee union, and the employer may need to follow the deduction requirement as per the union guideline in order to operate smoothly.

CRA Payroll remittance – All employers are required to remit the payroll deductions and the employer contribution to CRA. Most commonly, when you are a monthly remitter, you need to remit the CRA payroll remittance as per the form PD7A on or before the 15th of the following month. In some cases CRA may allow you to remit on a quarterly basis or may require you to remit on bi-monthly basis.

WSIB - If you are registered with the Workers Safety and Insurance Board, you need to file your monthly/quarterly return, calculate the premium, based on the prescribed rate of the gross wages, and pay the premium to WSIB. The WSIB premium rate is based on the nature of your industry.

Note: Executive officers or the self-employed (Owner) do not pay WSIB. 

EHT - You need to pay the Employer Health Tax when your gross payroll exceeds $1.0 million during the calendar year. This is only an employer obligation.

T4 - After the end of every calendar year, you need to provide a copy of T4 (Statement of remuneration paid) to your employee and file a copy with CRA.

ROE - When an employee leaves you or when you fire an employee, you need to issue the “Record of Employment”, provide a copy to the employee and file a copy with Service Canada.