Payroll has become a complex part of a business’s finances, and the complexity doesn’t come from the compensation structure alone. It also stems from the various payroll compliance issues and regulatory guidelines businesses must follow when generating their payroll.
Payroll compliance in Canada is not an exception to this norm; payrolls in Canada come with their own set of regulations and requirements.
The simplest definition of payroll compliance is adhering to payroll laws imposed by relevant governing bodies on all levels of the government, which in Canada means federal, provincial, and in some cases, local governments. These laws cover a company’s contributions to social security, the taxes that must be withheld from its employees’ wages, and more.
The major elements of payroll compliance in Canada (as per federal laws) are:
Establishing a Payroll Account: It’s Canada’s first payroll compliance requirement and may be tricky to navigate for sole proprietors or businesses relying upon freelancers and contractors switching to their first employee. Setting up such an account may require you to provide relevant information like Social Insurance Number (SIN) and Province of Employment (PoE).
Payment Frequency: The employees’ salaries in Canada are paid every two weeks, not monthly.
Income Tax Deduction: In Canada, the income tax is deducted at the source, so as an employer, you will be responsible for deducting the income tax from the salaries of your employees before transferring them. This also applies to foreign employees working full-time in Canada. These deductions must be remitted to the Canadian Revenue Agency (CRA), the main taxation body in Canada, on the 15th of every month.
CPP and EI Deductions: As an employer, you must deduct an amount from your employees to be paid towards the Canadian Pension Plan (CPP) and Employment Insurance Program (EI). You will also have to make contributions towards these programs as an employer.
The Quebec province has its own Quebec Pension Plan (QPP). Both employers and employees will pay 5.7% in 2023 towards CPP contributions for 11.4% of their salary. The total number was 10.8% for the QPP. Both employees and employers pay into the EI program as well.
The employee contribution rate varies yearly and is based on maximum insurable earnings. The employee contribution rate is 1.63% in 2023, and the employer has to deduct it and contribute 1.4 times more than that towards the program. So if they deduct $800 from an employee’s wages for EI, they would also have to contribute $1,120 towards the program. The rates for the Quebec alternative are relatively lower.
Taxable Benefits: The taxable benefits you offer your employees can influence how much you deduct from their payroll. The benefits fall into one of three categories: Cash, non-cash, or near-cash, and all three may be treated differently from a taxation perspective. You may have to follow specific guidelines regarding expenses like off-site relations. The same goes for special costs related to disabilities.
For employers offering supplemental health benefits into which both employers and employees pay, payroll compliance becomes a bit more complex. These contributions are considered qualifying medical expenses, which change their taxation status. Employer-sponsored pension plans may also impact payroll compliance in Canada.
Some payroll compliance requirements may vary from province to province. For example, five provinces in Canada have an additional payroll tax called Employer Health Tax (EHT). Its rate is 1.95% for businesses in Ontario that pay salaries of over $1 million and less than $5 million.
Ontario’s Workplace Safety and Insurance Board (WSIB) also collects premiums from employers based on their insurable earnings. There are different tiers and payment frequencies based on the earnings, but the payment is usually monthly for most businesses with more than $1 million in earnings.
Alberta outlines what (and by how much) an employer can deduct from an employee’s payroll. This includes lodging and food, social funds, retirement plans, etc. The employee has to offer written consent before these deductions can be made. Employers cannot deduct money for uniforms. They can deduct the relevant amount without employee consent but with notice if they make an error in payroll (and overpay) and unearned vacation payment.
The payroll compliance regulations of the two different provinces reflect the subtleties and nuances implicit in payroll compliance in Canada.
The penalties for not adhering to payroll compliance regulations in Canada vary from one infraction to another. For example, suppose you miscalculate EI or CPP contributions. In that case, you might be liable for the full amount even if you can’t deduct it from the employee’s salary (for employees that have already parted ways from the company). A penalty of 10% in the first year and 20% in the subsequent year may apply to miscalculated EI or CPP contributions.
Then there are financial penalties associated with late remittance/submission of the deducted amount to the relevant department. Late filing penalties are direct dollar amounts instead of percentages and are calculated based on the number of information slips. Wrong methods of filing and remittance also carry specific penalties.
It’s important to understand that all these penalties lie on the milder spectrum of repercussions you may face for not adhering to payroll compliance in Canada. If any infraction is considered tax fraud, the business may receive more than just warnings or financial penalties. The requisite individuals or businesses (as an entity) may have to face criminal charges.
Starting a business in Canada or expanding your international business to Canada gives you access to a mature market and skilled labor force. However, successfully running a business in Canada requires you to adhere to all compliance regulations associated with your business and payroll. Understanding the payroll laws of each province is essential to understanding payroll compliance in Canada.