Canada is the world's second-largest country in terms of total area and the world’s 10th largest economy. It is a parliamentary democracy and a constitutional monarchy in the Westminster style. The king and prime minister act as the chair of the cabinet and the head of government. When it comes to doing business, Canada ranks 23rd among 190 countries.
If you're thinking about starting a business in Canada, you will have to understand how payroll works.
How Is Payroll Calculated in Canada?
If you recruit staff to work for you as a business owner, you'll need a payroll. Employee information/names, the hours they work, any deductions, minimum wages, and any other record of payments that are to be made to the employees for all the paying cycles and the taxes the employees pay to the government form an essential part of the payroll.
It is pretty simple to set up payroll in Canada. While some mistakes are bound to happen, you can avoid these blunders by paying meticulous attention to detail when setting up a successful payroll. Also, you must adhere to payroll policies and procedures in Canada while setting up a payroll in Canada.
We've broken down the steps to ensure you have all of the necessary information before you begin using the new system.
You need to have the following information before setting up a payroll in Canada:
- ~Business Address
- ~Business Number
- ~CRA Payroll Account Number
- ~Workers Compensation Information
- ~ROEs issued
- ~YTD amounts owed to all the employees
- ~Bank account details
- ~Tax Rates
- ~Remittance schedule
Apart from this, employees must also include essential details of the employees:
Full Name of the employee
- ~Date of Birth
- ~Social Insurance Number (SIN)
- ~Bank account details for deposits
- ~Home Address
- ~Email ID
This checklist will assist you with setting up your business and adding your employees to a payroll process in Canada. This list, however, may not be exhaustive since you may require more information based on the nature of your business and the personnel you hire.
Important Elements of Salary Structure in Canada
According to Canada's standard payroll rules and regulations, the salary is divided into different components. Some essential elements of the salary structure according to the payroll rules and regulations in Canada are:
- ~Gross Income
- ~Employee Benefits
- ~Tax Deductions
- ~CPP Deductions
- ~EI deductions
Gross income, often known as gross pay, is the total amount of wages earned by an employee during a pay period before deductions or taxes.
The gross income calculation differs if an employee is paid hourly or a salary. To calculate an hourly employee's gross income, multiply their hourly pay rate by the total number of regular hours worked.
If an employee works overtime, the number of hours worked must be multiplied by the overtime pay rate. The total gross income for employees is then calculated by adding the two values together.
Employee benefits must be deducted from pay and are part of an employee's compensation package. Employee benefits may or may not be tied to the payroll, depending on the type of business.
During the employment process, this decision is taken into account. Employee perks are one method to show your employees that you care about them while also attracting and maintaining personnel for your company.
Employers must make tax deductions from the employee's total income. The payroll tax differs from the federal income tax in terms of taxing. According to the CRA's payroll deductions chart, payroll deductions vary by province.
The Canada Revenue Agency (CRA) has made it mandatory to create an account with them to obtain a business number (BN) using their Business Registration Online (BRO) service (Business Number). In addition, you must set up this account as an employer before the first remittance due date, which permits you to pay the Canadian government's payroll taxes.
The CPP (Canada Pension Plan) is a federally controlled pension program that assists Canadians in saving for retirement or disability. Except in the province of Quebec, it is a mandatory plan under which all Canadian employees and businesses contribute to the Quebec Pension Plan (QPP).
Unless they already receive a pension from the plan, Canadians working between 18 and 70 will be required to contribute to the Canada Pension Plan/Quebec Pension Plan.
Employment Insurance (EI) is money paid by the federal government to qualifying employees who have lost their jobs. Employees are paid a portion of their salary through the Employment Insurance when they cease working for the following reasons:
- ~When an employee is fired without cause,
- ~If an employee resigns, they will be fired with cause (Constructive Dismissal).
- ~When an employee is unable to work due to illness,
- ~If an employee takes parental or maternity leave and then returns to work,
- ~If an individual is unable to work because they must care for their family,
How to Set Up a Payroll in Canada?
To set up payroll in Canada, employers will make all the transactions in Canadian Dollars. You will have to provide all the necessary information about the employee and fulfill all the tax registration requirements. Plus, you must get a Social Security number for all the employees.
After this, you must register all employees for SIN and submit all the necessary documentation required for new employees. These documents include:
- ~A written statement with the terms and conditions of the employment
- ~Itemized pay statement
A Step-by-step Process of Payroll Processing in Canada
Listed below are the steps that must be followed while processing payroll in Canada:
- Register with all the federal agencies
You'll need a Business Number (BN) and a Canada Revenue Agency payroll program account (CRA) to process payroll in Canada. A BN is a number that the federal government uses to identify your company. It's the equivalent of a Social Security Number for businesses (SIN).
The nine-digit BN is included in a payroll program account, which is a 15-digit number. It's the CRA's unique identifier for the company. New firms can register for a BN and a payroll program account on the CRA website.
The following information is required during the registration process:
- ~Number of employees
- ~Payroll software or service you will use
- ~Payroll schedule, whether weekly, bi-weekly, or semi-monthly
To remit workplace insurance and health tax payments, employers may need to open accounts with the Ontario Workplace and Safety Board and the Ontario Ministry of Finance.
- Collect the information on all employees
Next, ask employees for the following information:
- ~Phone number and address
- ~Social Insurance Number (SIN)
- ~Year of birth
- ~For direct deposit, you'll need to know your bank account information.
Employees must submit TD1 forms from both the federal and provincial governments. Some payroll deductions are determined by the information they supply. On the CRA website, you can download TD1 forms.
In addition, employers performing their payroll manually should set up a secure records management system to keep track of sensitive employee data.
- Determine the gross pay
Employees' gross wages are their earnings before taxes, and retirement payments are deducted from their paycheck. Hence, the amount you put on an employee's offer letter is their gross wage. Gross wages can be represented over an hour, a pay period, or a calendar year.
You must include taxable fringe benefits when calculating gross pay. You must also add these benefits to gross compensation if you reimburse your employees for cell phone or parking expenses. You can find the taxability of perks and allowances on the CRA website.
Hourly workers who work more than 40 hours in a week or more than eight hours per day may be eligible for time and a half overtime compensation.
- Calculate all deductions
Both employees and employers pay payroll taxes and contributions in Canada.
You must withhold and remit a portion of your employees' salaries for taxes and contributions as an employer. The following are examples of CRA payroll deductions:
- ~There is a federal income tax.
- ~Income tax imposed by the province or territory
- ~Contributions to the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP)
- ~Premiums for Employment Insurance (EI)
- ~Contributions to a Registered Retirement Savings Plan (RRSP)
CRA deductions are necessary for everyone but the RRSP. Employees aged 18 to 69 pay CPP/QPP contributions, whereas employees of all ages pay EI premiums.
Employees and employers contribute to CPP/QPP and EI based on their incomes. Once you've reached your annual contribution cap, your contributions will end. Except for Quebec, all provinces have identical contribution rates and caps.
- Distribution of payments
It would be best to get done with the payroll reconciliation to check for problems before you finish processing payroll. You should also examine your payroll register, a list of payroll transactions, alongside your tax records and general ledger.
Once you fix all the mistakes, you can disburse your employees' paycheques.
Employers who manually process payroll should still present pay stubs to employees as proof of income when applying for loans and leases, keep track of accrued vacation and sick leave, and spot payroll problems.
Finally, in your accounting program, make a payroll journal entry. This phase can be completed by integrating your payroll and accounting software.
- Make all the tax deposits
Once you have calculated everything and issued paychecks, you will have to inform the employer about deductions and taxes. By default, firms must submit payroll deductions by the 15th of the month following the pay period, whether on paper or electronically.
However, you have multiple options if that pay schedule isn't for you. For example, established enterprises can adjust their payroll tax remittance frequency to quarterly, twice-monthly, or four times a month.
Send your federal taxes, provincial taxes, CPP deductions, and EI deductions to the CRA. Send QPP deductions to Revenu Quebec, Quebec's revenue department.
CPP and EI are the significant payroll contributions in Canada. CPP contributions are required in payroll to contribute to employee retirement accounts. However, there are limits on how much can be contributed.
The contribution rate has risen to 5.25 percent for combined employee and employer contributions, totaling 10.5 percent of salary. In 2020, the highest combined annual contribution will be CAD 2898.
Another mandatory contribution is unemployment insurance, which provides financial help if workers lose their jobs. The employer contributes 2.21 percent, while the employee contributes 1.58 percent. The employer's maximum yearly contribution to EI is CAD 1199, whereas the employee's maximum contribution is CAD 856.
The payroll cycle is the frequency with which you pay your employees. Each employer must adhere to a payroll schedule/frequency for employees to know when they expect to be paid.
The schedules that are followed in Canada are as follows:
- ~Once in two weeks
- ~Twice a month
Canada Payroll Options for Companies
There are several payroll options for companies in the US. You can opt-in for any of the payroll options listed below:
- Remote Payroll: A remote payroll is when a foreign corporation, i.e., a non-resident company, pays a resident employee. This will still need the corporation to declare Canadian source earnings and tax withholdings, which can be time-consuming. One alternative for a non-resident company to pay its employees in Canada (both local and international) is to use a fully outsourced service like a GEO, hiring and paying the employees on their behalf.
- Local Payroll Administration: In some circumstances, a firm can register in Canada yet have another company handle its payroll. Employers can do this with the help of a payroll service. It's crucial to remember that, as the primary employer, the corporation is still entirely responsible for ensuring that all employment, immigration, tax, and payroll rules are followed. Payroll calculations, payments, and filings, on the other hand, can all be delegated to a payroll provider.
- Internal Payroll: Larger organizations with a solid commitment to Canada may prefer to manage their local payroll in-house for all foreign and local personnel. They'll need to finish the incorporation process, register the company, and hire the essential personnel.
This strategy comes at a high price and requires familiarity with local labor and payroll laws. To ensure that the payroll fully complies with Canadian employment laws, the company will need a local accounting firm and legal counsel.
- Fully Outsourced PEO: Payroll can also be outsourced to third-party firms such as Multiplier. It is the most efficient approach to run your company's payroll operations because everything is outsourced to a worldwide PEO that controls the payroll on their end.
Entitlement and Termination Terms
Depending on the jurisdiction, an employer must either give the employee a term of notice or pay the employee salary in place of the notice period if the employee has been employed continuously for three or more months.
When an employee's insurable wages are interrupted, all employers must file a Record of Employment (ROE). The employer must give a copy to Service Canada and the employee and keep a copy.
Employers can also complete the ROE online through Service Canada or a payroll service provider. The electronic form is automatically sent to Service Canada, and the employee can access their copy on Service Canada's website.
Canada Payroll Processing Company
Partnering with a global PEO-EOR firm can take numerous responsibilities off your shoulders. For instance, a PEO company can handle your employee payroll, compliance requirements, and international employee management, among other things.
You can compare the services of different payroll processing companies online and choose the one that best suits your business needs.
How Multiplier Can Help With Global Payroll?
We take pride in offering the best SaaS-based PEO services available, which reduces payroll processes to a single click. Rest assured, you need not worry about employee payroll when you choose us.
Frequently Asked Questions
What is T4?
A T4 is a statement of compensation paid, an information sheet that shows how much money employees received and how much was withheld and transmitted to the government for tax purposes. It's also the form used to file your taxes each year.
How much tax will I have to pay if my salary is $50,000?
For the first $49,020, you will have to pay a 15% of taxes.
What all do I need to apply for Canada Pension Plan?
You would need the following details:
- ~Details of your existing bank account
- ~If you want to split a pension, you'll need your spouse's SIN number.
- ~You'll need your children's SIN numbers and birth certificates to request the child-rearing provision* on your CPP application form.