As an employer in Canada, you are responsible for remitting employment insurance, pension plan and tax payroll deductions to the Canada Revenue Agency regularly, along with your employer contributions.
Before hiring anyone, you have to complete registration formalities and then have employees fill out the information forms that determine how much income tax they will pay.
Based on factors provided by the CRA, you can calculate each deduction, add the employer contributions and submit the totals every month.
- To remit your contributions and payroll deductions, open a payroll account whose number consists of your business number, the letters RP indicating a payroll account and a four number identifier, usually 0001.
- When hiring, create a file for each employee that contains contact information and personal statistics such as the social insurance number.
- Each employee has to fill out federal form TD1, giving information for income tax, and a similar form for provincial income tax.
Bruce Donnelly is the president of Dion Vallee Income Tax and Bookkeeping Management in Ottawa, Ontario. “The EI and CPP deductions are fixed rates,” he says.
“Employers deduct the amounts and add their own contributions. For income taxes, they deduct amounts based on the TD1 forms and the tax tables provided by the CRA.”
You don’t have much time to implement your payroll system, because the first remittance to the CRA is due by the 15th day of the month after the month in which you start making deductions.
Calculating the EI Contribution
The government of Canada finances employment insurance through employer contributions and through deductions from employee salaries up to a maximum insurable amount.
To calculate the amount you should deduct from a salary:
- Multiply the annual salary up to the maximum amount by the factor provided by the CRA.
- Divide the result by 12 to get the monthly deduction.
The employer contribution is currently 1.4 times the employee deduction. In addition to submitting the required amounts each month, keep records for each employee for which you make deductions and contributions and the hours worked to earn those amounts.
Pension Plan Contributions
If an employee is between 18 and 65 years old, you have to deduct a Canada Pension Plan — Québec Pension Plan in Québec — contribution from his salary and make an employer’s contribution.
An employee who is between 65 and 70 years old may elect to stop contributing to the CPP by submitting to you form CPT30 Election. Employees who earn less than $3,500 in a year don’t have to pay pension contributions.
The pension contribution is 4.95 percent. To calculate the monthly contribution, take the annual salary, subtract the $3,500 exemption on which no contribution is due, and multiply the result by 0.0495, taking into consideration that there is a maximum salary which is adjusted annually.
Divide the annual contribution by 12 to get the amount to deduct every month. Add the employer contribution, which is the same as that of the employee, to get the amount you have to remit.
Payroll Income Tax Deductions
The CRA provides tax deduction tables for federal tax and for each province except Québec. Revenue Québec publishes its own tables. Tax tables are available online, as paper forms and as formulas that you can plug into spreadsheets or payroll programs.
You need the TD1 employee tax credit form, which each employee has to fill out, to determine the federal payroll deduction, and a corresponding form for provincial income tax. Don’t forget to include taxable benefits such as company cars in total income.
Remitting the Deductions
The deadlines for making the payments to the CRA depend on the amounts you have to remit. The Average Monthly Withholding Amount, or AMWA, is the average amount you paid two years ago, over the course of that year.
- If you had no employees two years ago or have an AMWA of less than $15,000, your deadline for payment is the 15th day of the month following the month in which you pay the salaries.
- If your AMWA is between $15,000 and $50,000, your deadlines are the 25th of the month for salaries paid in the first half of the month, and the 10th of the next month for salaries paid the second half of the month.
- For employers with an AMWA of over $50,000, the deadlines are three working days after the end of the week in which they pay salaries. Penalties are 10 percent for the first and 20 percent for subsequent late payments.
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