How does Vacation Pay work in Canada?
Paying vacation is a requirement for all employers in Canada. Employers are required to pay a vacation rate on their employee’s vacationable earnings (earnings subject to vacation pay). Vacationable earnings rules differ across the country. Here are two examples:
- In Ontario, both hourly pay and overtime are considered vacationable earnings.
- In Alberta, hourly pay is considered vacationable earnings but overtime is not.
If an employee earns $1,000 regular wages and $200 overtime and assuming a 4% vacation rate:
- In Ontario, the employee would be entitled to $48 in vacation pay (4% x $1,200)
- In Alberta, the employee would be entitled to $40 in vacation pay (4% x $1,000)
Employers can track and pay Vacation in two primary ways:
- Pay out every period as part of employees' Gross Pay
- Accrued and paid later in the form of paid time off or lump sum payout.
How do I know which Vacation policy is best for me?
Pay out every period policy is best used for the following types of employees:
- Part-time employees
- Hourly employees with irregular weekly hours
- Commission employees (cannot accrue vacation)
You would use this policy if you don’t track accrued time-off for employees. When employees work, they get paid regular wages and vacation pay. When they take time off, they don’t get paid.
Accrued vacation policy is commonly used for the following types of employees:
- Salaried employees
- Full-time hourly employees
You would use this policy if you want to track accrued time off for employees. When employees work, they get paid regular wages. When they take time off, they get paid vacation pay by drawing from their accrued vacation balance.
When creating a vacation policy, Standard Payroll assigns a default vacation rate percentage based on the minimum requirement of the province that the work location is in. This vacation rate percentage can be adjusted at any time. If you’re not sure which rates apply to your employees, this is a great time to seek assistance from your tax advisor or a payroll expert. For more information regarding vacation policies, go to Canada's Annual vacations page.
How to setup a vacation policy in QuickBooks Payroll (QP)
- Go to Payroll then Employees.
- Select Add an employee to add an employee or select an employee to edit their information.
- Go to Step 5 in the employee profile (Vacation policy section).
- Select a policy or Create new vacation policy.
- If creating a new vacation policy, select whether you want to Accrue vacation or Pay out each period.
- If you select Pay out each period, enter the vacation rate as a percent. If you are setting it up for the first time the default is the provincial minimum (e.g. 4.00% for most provinces).
- Select Save and set policy.
- If you select Accrue vacation, see Accrue vacation in Standard Payroll.