Setting up payroll is a crucial step for businesses looking to grow and hire employees. Whether you're a solopreneur hiring your first team member or managing a mid-sized business, payroll ensures that your employees are paid accurately and on time. It also keeps your business compliant with the Canada Revenue Agency (CRA).

This guide will walk you through the process of setting up payroll in Canada, including everything from registering with the CRA to automating payroll deductions. Keep reading to gain the tools and knowledge you need to manage payroll efficiently and focus on growing your business.

Table of contents

• Understanding payroll in Canada
• Registering with the CRA
• Choosing a payroll solution
• Gathering employee information
• Calculating payroll deductions
• Setting up direct deposit or cheques
• Staying compliant with CRA requirements
• Key tips for managing payroll efficiently
• Frequently asked questions 

Understanding payroll in Canada

Payroll is the process of compensating employees for their work, but it goes beyond simply writing a cheque. In Canada, payroll also involves calculating and remitting employee deductions such as income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums. Employers are also responsible for remitting their own contributions to the CRA.

Managing payroll accurately is essential for:

• Ensuring employees are paid on time.
• Avoiding penalties for non-compliance with CRA regulations.
• Building trust and morale within your team.

Registering with the CRA

Before you open a payroll account with the CRA, you must first register a business number (BN) for your organization. A business number is a unique nine-digit number that identifies your business to federal, provincial, and local governments. The CRA uses your BN to identify your company for all tax matters related to your business, including earnings and payroll taxes.

Your BN identifies your business when you register with any of the four major government programs outlined below:

• Goods and services taxes/harmonized sales taxes (GST/HST)
• Payroll deductions for employees
• Import-export
• Corporate income tax

For each program account, your business receives a 15-character account number.

The first nine digits of the account number are your BN. Next, a two-letter acronym identifies the program. Finally, a four-digit number references the specific account.

If you sign up for payroll online, then your BN will have the initials RP.

Below is a guide to Canadian business numbers:

• RT for GST/HST accounts
• RP for payroll accounts
• RM for import-export accounts
• RC for corporate income tax accounts

All sole proprietors, partnerships, corporations, trusts, and other ownership types receive an individual BN. You use your BN for all your company’s dealings with the agency, so memorize it or keep it close at hand.

To register for payroll:

1. Visit the CRA’s Business Registration Online page.
2. Provide your business details, such as your legal name, business structure, and operating address. You will also need basic personal details, including your Social Insurance Number (SIN).
3. Once registered, you’ll receive your BN, which is required to remit payroll deductions.

Registering early is critical to avoid delays in processing employee pay and remitting deductions.

Choosing a payroll solution

Managing payroll manually can be time-consuming and prone to errors. Many businesses opt for one of the following solutions:

Manual calculations

This option is low-cost but requires an in-depth understanding of payroll laws, tax deductions, and CRA remittance deadlines.

Payroll tools

Payroll solutions automate calculations, track deadlines, and ensure compliance. They’re designed for businesses of all sizes and provide a seamless experience.

Outsourcing to a payroll provider

For larger businesses or those with complex payroll needs, outsourcing to a payroll service provider can save time and reduce risk.

Choosing the right method to process your payroll depends on the size of your business and other business needs such as the complexity of payroll calculations, the frequency of pay periods, your budget, and your familiarity with payroll compliance requirements.

For example:

• Smaller businesses with a limited number of employees may prefer using affordable payroll software or even manual processing if costs are a significant concern.
• Larger businesses or those with employees in multiple provinces may require a more robust solution, such as outsourcing to a payroll provider, to handle varied tax rates, benefits, and deductions.
• Businesses with a need for efficiency and accuracy often choose automated payroll tools like QuickBooks, which simplify the process, reduce human error, and ensure compliance with CRA deadlines.

By evaluating these factors, you can select the payroll processing method that best aligns with your business's unique requirements.

Gathering employee information

Once you have your BN and register your payroll account with the CRA, you can hire new employees and calculate the appropriate deductions required for remittance on their behalf. To get started, you'll need your employee to file a TD1 Personal Tax Credits Return.

The TD1 Form determines how much tax to deduct from an individual’s employment income. You don’t need to submit either the federal or provincial form to the CRA, but the employee needs to complete the forms, and you need to keep them on file in your offices.

If your employees experience changes in their tax situation, they should complete a new TD1 Form. A best practice is to have employees complete a new form in January every year.

To help you determine how much tax to remit for your employee, the TD1 Form takes into account the employee’s dependents and other items that affect how much tax the employee owes. The more accurate the information your employee provides, the fewer corrections there are at tax time.

The form asks your employee for their name, address, date of birth and SIN and provides lines to fill in based on tax credits and deductions such as:

• Basic personal amount
• Caregiver amount
• Age amount
• Pension income amount
• Tuition
• Disability amount
• Amounts your dependent(s)
• Transfers from your spouse, common-law partner, or dependents

Calculating payroll deductions

In order to calculate payroll deductions, you'll need to choose a pay period frequency. Bi-weekly and monthly are the most common, but weekly and semi-monthly are also options. The pay period you choose will determine how often employees receive paycheques.

• Weekly (every week on the same day) = 52 pay periods per year
• Bi-weekly (every two weeks on the same day) = 26 pay periods per year
• Semi-monthly (twice per month on the same dates every month) = 24 pay periods per year
• Monthly (once per month on the same date every month) = 12 pay periods per year

As an employer, you must know each of your employees’ province or territory of employment so you can withhold the proper deductions when you file your payroll online. This depends on where your employee physically reports for work. If your employee works from home, they might pay taxes to a different province or territory than your small business if those two locations are in different.

For income tax, Canada Pension Plan (CPP) and Employment Insurance (EI) withholding purposes, an “establishment of the employer” is any place or premises in Canada that you, as the employer, own, lease, or rent. It’s usually where one or more employees report to work or where one or more employees receive payment. This doesn’t have to be a permanent physical location.

For example, the place of business for a construction company can be one or more construction sites, or the place of business for a carnival can include a shopping mall parking lot. In these examples, the employee’s province or territory of employment is the location of the construction office or shopping centre parking lot.

If your employee reports to your establishment in person, the employee’s province or territory of employment is the same as that used for your office.

Example 1

Your head office is in Ontario, but you require your employee to report to your place of business in Manitoba. In this case, use the Manitoba payroll deductions tables.

Example 2

Your employee works from a home office in Alberta but occasionally has to report to your Alberta office. You pay your employee from your head office in Ontario. Here, you use the Alberta payroll deductions tables since the employee sometimes reports to your Alberta office.

Example 3

Your employee doesn’t have to report to any of your places of business, but you pay the employee from your office in Quebec. In this case, use the Quebec payroll deductions tables. The employee doesn’t have to pay CPP contributions but may have to pay Quebec Pension Plan (QPP) contributions.

Once you determine the province or territory to use for deducting CPP contributions, EI premiums, and income tax, you can use the payroll deductions online calculator to determine the employee and employer portions you need to send to the government for each pay period. These amounts are considered owing to the Receiver General of Canada.

Hold any of the deductions you take from an employee’s pay in trust for the Receiver General in a separate account from your operating business account so that you have the funds readily available when it comes time to remit them to the CRA.

Setting up direct deposit or cheques

Most businesses in Canada now use direct deposit as their preferred method of paying employees. It’s faster, safer, and more reliable than issuing paper cheques.

Follow these steps to set up direct deposit:

1. Collect employee banking information, including the bank name, branch and transit number, and account number.
2. Use your payroll solution, to enter these details securely.
3. Confirm payment details before processing.

If you prefer cheques, ensure they’re issued promptly and tracked for your records.

Staying compliant with CRA requirements

After setting up payroll, it’s important to understand how to remit CPP, EI, and income tax deductions to the CRA. Your remittance schedule depends on your remitter type, which is determined by your average monthly withholding amount (AMWA). For most new businesses, the CRA assigns the regular remitter type, which requires monthly payments.

The CRA bases your remittance deadline on your employees’ payday—not the pay period end date. This distinction is critical for staying compliant and avoiding penalties.

Example:

• Pay period: July 3 to July 16
• Payday: July 24

In this case, use July 24 to calculate your remittance deadline. If you're a regular remitter, your payment to the CRA is due by August 15 (the 15th day of the month following the payday). If August 15 falls on a weekend or public holiday, the due date moves to the next business day.

While most new businesses start as regular remitters, some may qualify for accelerated schedules over time. These schedules require payments within 3 or 7 days after the payday, depending on your AMWA. The CRA will notify you if your remitter type changes.

Once you’ve calculated deductions, you can remit them using one of these methods:

• CRA My Business Account online
• Pre-authorized debit
• Paper forms and cheque mailed to the CRA

For more detailed information on remittance schedules and methods, visit the CRA’s remittance guide.

The CRA can apply a penalty if the following occur:

• You deduct the amounts but don’t remit them to the CRA
• You deduct the amounts but your remittance is late

Penalties are:

• 3% for amounts one to three days late 5% for amounts four or five days late 7% for amounts six or seven days late
• 10% if the amount is more than seven days late or if you don’t remit any amount

Additionally, if this is the second or subsequent time you're assessed this penalty in a calendar year, and the failures were made knowingly or under circumstances of gross negligence, the penalty increases to 20%.

Key tips for managing payroll efficiently

Payroll management doesn’t have to be overwhelming. Follow these tips to stay organized:

• Automate processes: Use payroll tools to calculate deductions and issue payments.
• Set reminders for deadlines: Avoid penalties by staying on top of remittance and filing dates.
• Review regularly: Conduct periodic payroll audits to ensure accuracy.
• Stay informed: Payroll laws can change, so subscribe to updates from the CRA or consult an expert.

Setting up payroll is a critical step for any Canadian business. With the right tools and processes in place, you can save time, reduce errors, and ensure compliance with CRA regulations. QuickBooks Payroll tools are designed to make payroll management seamless, giving you the confidence to focus on growing your business.