Small businesses that hire employees must be aware of all payroll responsibilities attached to being an employer. Operating a business in Canada means complying with all pay regulations dictated by the Canada Revenue Agency (CRA), including required deductions and remittances.
Learn what payroll deductions are, the various types associated with them, and the remittance schedule you must follow as required by the CRA.
What is a Payroll Deduction?
A payroll deduction is a specific amount of money taken out of an employee’s gross wage to pay for a service or government program. The amount leftover from these deductions is the net wage, which will then be paid to the employee.
Deductions can be grouped into mandatory and voluntary deductions. A mandatory deduction includes government programs that all businesses with employees must join, such as pension plans, insurance, and taxes. A voluntary deduction includes healthcare benefit packages, savings bonds, charitable contributions, and social funds.
Prior to making a deduction, you will need to ensure all taxable benefits are accounted for on your employees’ pay. As the employer, this responsibility will fall to you. Once all taxable benefits are accounted for, you can start making the appropriate deductions.
Each tax season, the Canada Revenue Agency issues a payroll deductions table for each province to ensure businesses calculate appropriate decreases in their employees’ wages.
Examples of Payroll Deductions
Typically, employers will need to account for three specific types of deductions in Canada.
- Canada Pension Plan
- Employment Insurance
- Income Taxes
Canada Pension Plan (CCP)
The Canadian Pension Plan is a mandatory deduction that must be made for any employee between the ages of 18 and 70, who is in pensionable employment, and is not already receiving CPP or disability. The CPP contributions cover all provinces, except Quebec, which has its own Quebec Pension Plan (QPP).
As an employer, you will need to use the annual CPP contribution rates and maximums to calculate the proper deductions. This amount withheld is used for each employee’s pension plan, which provides basic benefits to them when they retire or become disabled.
Employment Insurance Premiums (EI)
Employment insurance is another mandatory form of deduction. EI is a program run by Canada’s federal government that protects workers who are unable to work due to sickness, pregnancy, maternity leave, or when caring for a seriously ill family member, by paying out their benefits.
Employees will deduct EI premiums from each dollar of their pay, up to the yearly maximum. The employer will also contribute to the EI, which is 1.4 times the premium withheld for each worker. Employers can use the annual EI premium rate and maximum to calculate the appropriate deductions from payroll.
For employees working in Quebec, they will be required to pay into the Quebec Parental Insurance Plan (QPIP) while also meeting a reduced EI premium rate.
Income taxes are paid at a federal and provincial or territorial level and are the third main mandatory form of deductions. Employers are responsible for deducting income taxes from the income they pay their employees and must consider the provincial employment taxes to withhold the proper amount.
To correctly calculate income taxes, employers will need to use Form TD1, known as the Personal Tax Credits Return. Individuals will need to complete this form and provide it to their employer to keep on file. Individuals in Quebec will need to use a different form, known as the TP-1015.3-V, Source Deductions Return.
What is Payroll Remittance?
The deduction and remittance process go hand in hand for employers in Canada. The payroll process includes paying employee salaries by calculating, deducting, and remitting the government’s source deductions for every pay period issued. In simple terms, remittance is the filing of payroll deductions to the Canadian government.
How do you Remit Payroll Deductions to the CRA?
Employers can remit their payroll deductions to the Canada Revenue Agency by way of mail or online. My Business Account is the CRA portal where businesses can register and file their source deductions online.
Employers must meet specific remittance deadlines each year. Suppose they do not remit their source deductions on time, including income taxes, Canada Pension Plan contributions, and Employment Insurance Premiums. In that case, the CRA can incur penalties against you.
Late Remittance Penalty Charges
Failure to file, inaccurate filing, or late or nonpayments of these mandatory deductions could result in the government taking legal action against your business. The penalty for late or nonpayments include:
- 3% if payment is one to three days late
- 5% if payment is four to five days late
- 7% if payment is six to seven days late
- 10% if payment it more than seven days late, or no amount is paid at all
- 20% for recurring penalties in one calendar year
If you fail to make these payments and fines, the CRA can garnish wages or other sources of income, seize and sell your business assets, or use applicable statutes and laws to acquire the amount owing, resulting in prosecution, fines, and possible imprisonment.
Employers must follow the payroll remittance schedule as outlined by the Canadian government.
If a due date falls on a weekend or public holiday, the CRA must receive the remittance on the following business day.
Small businesses that do not have any source deductions to remit within a month or quarter are known as nil remittances. Typically, this happens when a company has no employees or hires seasonal workers. In these instances, you still need to report to the CRA the nil remittance status.
Your remitter type is what will dictate the frequency and remittance period to use for your payroll filing. To figure out what type your small business falls under, you will need to look at your average monthly withholding amount (AMWA) from two calendar years ago.
This amount covers the total sum of all payroll deductions you have paid to the CRA in a calendar year, averaged out monthly. Using this data from the past two years will categorize your business in the new, regular, accelerated, or quarterly remitter type.
You will also be able to check your remitter type on your My Business Account with the CRA to ensure you fall under the right category.
Making your Remittance Payments
To remit payments to the CRA, you will need to fill out specific forms dictated by your remitter type. Regular, quarterly, and monthly remitters must use Form PD7A, Remittance Voucher – Statement of Account for Current Source Deduction. Accelerated remitters should use either Form PD7A(TM), Remittance Voucher – Statement of Account for Current Source Deduction, or Form PD7A-RB, Remittance Voucher.
Alongside the completed form, you will need to send the CRA applicable payments. To pay your small business’s payroll remittance amount, you can choose one of the methods below:
- Online using the My Business Account
- By phone
- The CRA’s My Payment Service
- Pre-authorized debit
- At your Canadian financial institution with the attached personalized remittance voucher
- By mail with an attached cheque only, sent to Canada Revenue Agency, 875 Heron Road, Ottawa ON K1A 1B1
- Through a third-party service, if you’ve chosen to outsource your payroll
Payroll Accounting Software
One way to streamline the payroll deductions and remittance process is by using quality online software, such as QuickBooks Online. This accounting software offers small businesses a small business payroll feature that can help employers calculate deductions for them, saving you time, and a headache, in the process.