How to Do Payroll Correctly in Canada

Payroll in Canada involves a series of obligations employers must fulfill, including calculating wages, making accurate deductions, remitting withheld funds to government authorities, and comprehensive reporting. Navigating these requirements is essential for businesses to maintain compliance with federal and provincial regulations, avoiding penalties and ensuring employees receive correct entitlements.

Setting Up Your Payroll System

Before processing any payments, establishing a proper payroll system is a foundational step for Canadian employers. This begins with obtaining a payroll program account from the Canada Revenue Agency (CRA). Employers can register for this account online, by phone, or by mail. Once the account is established, gathering comprehensive employee information becomes the next crucial step. For each new employee, employers must collect their Social Insurance Number (SIN), which is used for tax and benefit purposes. Additionally, employees need to complete federal Form TD1, the Personal Tax Credits Return, and if applicable, a provincial TD1 form. These forms inform the employer about the employee’s personal tax credit amounts, influencing the income tax withheld from their pay. Banking information for direct deposit and personal contact details are also collected to facilitate timely and accurate payments. Employers also need to determine their payroll frequency, which dictates how often employees receive their pay. Common options in Canada include weekly, bi-weekly, semi-monthly, and monthly pay cycles. Some provinces may have regulations regarding minimum payday frequency.

Calculating Employee Pay and Deductions

Calculating employee pay and deductions forms the core of the payroll process. This begins with determining an employee’s gross pay, their total earnings before any deductions. Gross pay can be calculated based on an hourly wage multiplied by hours worked, a fixed salary, commissions, or other taxable benefits. After calculating gross pay, mandatory deductions must be applied. The Canada Pension Plan (CPP) contributions are required from both the employee and the employer, with each contributing an equal percentage. For 2025, the employee and employer CPP contribution rate is 5.95% on pensionable earnings above a basic exemption of $3,500, up to a Year’s Maximum Pensionable Earnings (YMPE) of $71,300. An additional tier of CPP contributions, known as CPP2, applies to earnings between the YMPE of $71,300 and the Year’s Additional Maximum Pensionable Earnings (YAMPE) of $81,200, with a rate of 4.00% for both employee and employer in 2025. Employment Insurance (EI) premiums are another mandatory deduction, collected from employees and matched by employers at a rate of 1.4 times the employee’s contribution. For 2025, the employee EI premium rate is $1.64 per $100 of insurable earnings, with a maximum insurable earnings (MIE) of $65,700. Income tax is also withheld from each pay, with the amount determined by federal and provincial tax deduction tables, along with the information provided on the employee’s TD1 forms. Beyond these statutory deductions, other common deductions may be applied based on employee agreements or company policies. These can include contributions to Registered Retirement Savings Plans (RRSPs), group insurance premiums for health benefits, or union dues. Employers must obtain employee consent for voluntary deductions.

Remitting Payroll Deductions

Employers are obligated to remit withheld payroll deductions to the Canada Revenue Agency (CRA). The frequency of these remittances depends on the employer’s average monthly withholding amount (AMWA), which determines their remitter type. New employers, or those with an AMWA of less than $1,000, may qualify for quarterly remittances, due by the 15th day of the month following the end of each quarter (January 15, April 15, July 15, and October 15). Most employers are regular remitters, meaning they remit monthly, with deductions due by the 15th day of the following month after the pay period. For example, deductions for January pay are due by February 15. Accelerated remitters, those with higher AMWAs, must remit more frequently, either twice a month (Threshold 1) or up to four times a month (Threshold 2). Employers can make payments online through their financial institution, the CRA’s My Payment service, or My Business Account portal. Pre-authorized debit can be set up for automated payments. Payments can also be made in person at a financial institution or by mail. As of January 1, 2024, payments exceeding $10,000 must be submitted electronically.

Payroll Reporting and Record Keeping

Employers have ongoing and annual reporting obligations, alongside strict record-keeping requirements. For each pay period, employers are legally required to provide employees with a detailed pay stub. This document must clearly list the employee’s gross pay, all deductions taken (such as income tax, CPP, and EI), and their net pay. At year-end, employers must prepare and file T4 slips for each employee. These slips report the employee’s annual earnings, taxable benefits, and all deductions withheld for the calendar year. The deadline for filing T4 slips with the CRA and distributing copies to employees is the last day of February following the calendar year to which the slips apply. For instance, T4 slips for the 2024 tax year are due by February 28, 2025. Electronic filing is mandatory for employers issuing more than 50 slips. If an error is discovered on a previously filed T4 slip, employers must amend it promptly. This involves creating a new T4 slip, marking it as “amended,” and submitting it to the CRA, while also providing copies to the affected employee. The CRA accepts electronic or paper amendments, regardless of the original filing method. Maintaining comprehensive payroll records is a federal requirement. Employers should retain documents such as timesheets, pay rates, deduction calculations, and remittance receipts. The Canada Revenue Agency requires keeping all payroll records for a minimum of six years from the end of the last tax year they relate to. Some provincial employment standards may have slightly different retention periods. Secure storage, whether physical or digital, is important to ensure accessibility for audits or employee inquiries.

Key Provincial Payroll Differences

Provincial variations introduce additional considerations for employers. Quebec, in particular, operates with a distinct payroll system due to its unique social programs and tax collection mechanisms. In Quebec, instead of the federal Canada Pension Plan (CPP), employees and employers contribute to the Quebec Pension Plan (QPP). Quebec also has the Quebec Parental Insurance Plan (QPIP), which provides maternity, paternity, parental, and adoption benefits, funded by premiums collected from both employees and employers. This plan results in a lower Employment Insurance (EI) premium rate for Quebec residents. Furthermore, Quebec collects its own provincial income tax separately from federal income tax. Employers in Quebec must remit provincial income tax to Revenu Québec, rather than the CRA, and issue RL-1 slips (Relevé 1) instead of T4 slips for provincial income reporting. Employers in Quebec are also subject to contributions for the Commission des normes, de l’équité, de la santé et de la sécurité du travail (CNESST), which covers workplace health and safety. Beyond Quebec, other provinces may impose their own specific payroll taxes or contributions. Some provinces levy an Employer Health Tax (EHT) on employers’ payrolls. The thresholds and rates for these provincial health taxes vary by jurisdiction. Additionally, each province sets its own specific minimum hourly wage. Employers must ensure compliance with both federal and the specific provincial regulations where their employees work.