For employers hiring in Canada, making certain payroll deductions is a statutory obligation and getting it wrong can mean fines or penalties. For employees working for Canadian companies, understanding deductions not only helps them understand their pay stub, but ensures they understand government benefits they are eligible for.
Who is required to make payroll deductions in Canada?
Employers in Canada are required to make statutory deductions from their employee's gross pay; that includes any employer who pays salaries, commissions, wages, tips, or provides certain taxable benefits to employees. Both Canadian resident and non-resident employers are required to make deductions from the gross pay of their employees in Canada.
These deductions are remitted to the Canada Revenue Agency (CRA), except for certain deductions from employees reporting to a place of business in Quebec, which are remitted to Revenu Quebec, an agency of the provincial government of Quebec.
It is important to note that self-employed individuals are also responsible for remitting required deductions to the CRA, though they are generally due when filing their year-end taxes at the end of April.
Requirements before making payroll deductions
Before a company can legally make deductions from employee gross pay and remit to the government, there are two important pieces of information a company needs:
- a 9-digit business number, which is provided to companies hiring in Canada when they register with the CRA, and
- the company's payroll deductions account number, which is also provided by the CRA.
The CRA has an extensive guide on setting up a payroll account for remittances that outlines everything a company needs to provide to register and get their business number and payroll account number.
Employers also need certain pieces of information from employees, especially their social insurance number (SIN). An employee's SIN is usually provided to an employer during onboarding when the employee completes form TD1 for their employer.
Can employers be exempted from making payroll deductions?
There are some limited exceptions for statutory payroll deductions. Some employers can be exempted from their withholding obligation when they apply for and get an income tax waiver from the CRA. For example, certain non-resident employers may not be required to withhold and remit payroll deductions on payments they make to non-resident employees who are working in Canada for a limited time.
There are also instances when employers may not have to deduct employment insurance (EI) premiums, including when they hire family members. For more details, see our article on how Employment Insurance works. Barbers and hairdressers, taxi drivers, and drivers of other passenger-carrying vehicles are also subject to different rules on payroll deductions.
What are the statutory payroll deductions in Canada?
Certain payroll deductions, called statutory deductions, must be withheld every pay period from each pay cheque. Pay periods may vary from weekly, biweekly, monthly, or semi-monthly, depending on the company and where the employee lives.
Generally speaking, there are two types of deductions: statutory (ie. required) deductions, and voluntary deductions. We'll first look at statutory deductions, which are remitted to the government.
Income taxes
Taxes are an inescapable part of life, unfortunately. In Canada, both federal and provincial income taxes are deducted from employee gross pay during payroll. Federal taxes in Canada work similarly to federal taxes in the US. There are various tax brackets with tax rates that increase as taxable income increases.
Provinces have a varying number of brackets and a range of different marginal tax rates. Payroll tax deductions are made based on where the employee reports for work, while what an employee owes in income taxes at the end of the year is based on where they live.
For example, if an employee lives in British Columbia and works remotely for a company in Ontario, the employer will make payroll tax deductions based on Ontario income tax rates. At the end of the year when the employee files their income taxes in British Columbia, the employee will owe taxes to the government of British Columbia based on British Columbia income tax rates. This may result in either a tax refund, or additional taxes owing, depending on the difference between taxes deducted and taxes owed.
Canada Pension Plan (CPP)
The Canada Pension Plan (CPP) is a part of the public Canadian retirement system. Each pay period, employers must deduct a portion of an employee's gross pay, up to an annual maximum, and remit it to the CRA. Employers must also contribute an equal amount each pay period that is remitted to the CRA.
In Quebec, instead of deducting and paying CPP, employers deduct QPP (Quebec Pension Plan) and remit it and the employer amount to Revenu Quebec.
Employment Insurance (EI)
Employment Insurance, or EI, is a government program that provides income support to employees who lose their job or stop working for a period due to layoffs, illness, disability, or pregnancy.
Similar to CPP, employers must deduct a portion of an employee's gross pay each pay period and remit it to the CRA. EI is also subject to an annual maximum, and employers also contribute an amount (albeit a higher amount) each pay period.
In Quebec, the contribution rate that employees and employers pay each pay period is lower, however employees and employers must also contribute to the province's Quebec Parental Insurance Plan, or QPIP, each pay period.
Other statutory deductions
Depending on where an employee works and where their company is located, there may be other required payroll deductions and contributions. This can include provincial payroll taxes such as employer health taxes, worker's compensation premiums, or union dues and company pension plan contributions.
If a company has a group benefits plan, some deductions may be made from employee gross pay as well. Employees usually pay the premiums for coverage such as life insurance, AD&D, dependent life, and critical illness. If an employer paid these premiums the benefit of these policies to the employee would be taxable. However, if the employee pays the premiums the benefit is not taxable.
Employers are also responsible for deducting and remitting court-ordered alimony and wage garnishments.
Voluntary payroll deductions
Employees can volunteer to have other amounts deducted from their pay on top of the statutory deductions mentioned above.
The most common voluntary deductions are payments into a Registered Retirement Savings Plan (RRSP) or into a Tax-Free Savings Account (TFSA). RRSPs are analogous to 401(k) plans in the US, where contributions are tax-deductible, and withdrawals are taxable when an employee withdraws amounts in retirement.
TFSAs are like Roth IRAs in the US, where contributions are made with post-tax dollars but savings and investments in a TFSA account are allowed to grow and be withdrawn tax-free. Both RRSPs and TFSAs are subject to maximum annual contribution amounts.
Other voluntary deductions may include some health benefit program premiums, where the employee and the employer share equally in the payment of health benefit premiums but the employer's share is not reflected in the pay stub. Premiums for health benefits programs are considered voluntary payroll deductions if the employee can choose the amount of coverage and thus how much they pay in premiums.
How to remit payroll deductions in Canada
Employers must remit statutory deductions and additional employer contributions to the CRA. As we mentioned above, employers must have a business number and payroll account number from the CRA before withholding and remitting these payroll deductions.
In Quebec, employers must remit provincial taxes, QPP, and QPIP to Revenu Quebec rather than the CRA.
The schedule for remitting payroll deductions and contributions to the CRA is based on the type of remitter and the payroll pay day. The type of remitter is determined based on the average monthly withholding amount (AMWA), which is calculated by adding up all the income taxes, CPP, and EI, withholdings remitted to the company's payroll program accounts in the previous two calendar years. The amount is then divided by the total by the number of months in that year (maximum 12) that the employer had to make payments in.
Regular remitters
By default, new employers, or those with an AMWA over the previous two years of less than $25,000, are considered regular remitters and must remit the deductions on or before the 15th day of the month following the month in which the deductions were made.
For example, deductions and contributions owed to the CRA that were made on any pay days in November are owed to the CRA on December 15th.
Quarterly remitters
New small employers paying remuneration for the first time will have the option to apply for and remit payroll deductions quarterly instead of monthly for the first year. Eligibility requirements for this are as follows:
- the employer's monthly withholding amount (MWA) is less than $1,000, and
- the employer has a perfect compliance history.
For eligible new small employers choosing quarterly remittances, the due date is on or before the 15th day of the month immediately following the end of each calendar quarter. The remittance dates are April 15, July 15, October 15, and January 15 each year.
Accelerated remitters
Large employers with an AMWA of $100,000 or more must pay their remittances on an accelerated schedule. Most larger employers engage payroll service companies or employers of record like Thirdsail to reduce the complexity of compliance with the payroll deductions and do the calculation and the remittances on their behalf.
There are two types of accelerated remitters at two different thresholds. The table below provides a description of the thresholds and the remittance due dates for each.
Seasonal employers
Employers with no source deduction, such as seasonal employers or those that changed business status, also need to report a nil remittance to the CRA by the due date; otherwise, the CRA will expect a remittance from the employer on the due date.
If a company does not remit the correct payroll deduction and contribution amounts, or is late with a remittance, the CRA may levy fines, penalties, and interested owed to the CRA.
Thirdsail makes payroll easy
You need an efficient and compliant payroll solution to hire the best employees in Canada. Thirdsail is here to help.
Thirdsail helps companies around the world hire employees in Canada. We help you hire employees instantly without having to open a subsidiary and make sure your employees have all the right deductions and contributions that are remitted on time.
Making payroll deductions can be complicated, which is why understanding how deductions work is important for both employers and employees.
