How to Do Payroll in Canada: A Step-by-Step Process

Payroll management in Canada involves more than simply compensating employees; it encompasses a comprehensive framework of compliance with governmental regulations. Employers are responsible for accurately calculating, deducting, and remitting various amounts to federal and provincial authorities. This process ensures that employees’ contributions to social programs and income tax obligations are met. Understanding these requirements is fundamental for any business operating in Canada.

Setting Up Your Payroll Account and Employee Information

Before processing any payroll, employers must establish a payroll program account with the Canada Revenue Agency (CRA). This account is identified by a unique 15-character number, which includes a 9-digit business number, a two-letter program identifier (“RP”), and a four-digit reference number. The quickest way to register for this account is through the CRA’s online Business Registration Online system. Registration can also be completed by phone or by mailing Form RC1, Request for a Payroll Program Account, to a tax services office.

Once the payroll account is established, gathering employee information becomes the next step. This includes each employee’s full legal name, address, date of birth, and Social Insurance Number (SIN). The SIN is a nine-digit number for identifying individuals for tax and benefits purposes.

A document to obtain from each employee is the TD1 Personal Tax Credits Return. This form allows employees to claim various non-refundable tax credits, which influence the amount of federal and provincial income tax withheld from their pay. For employees working in Quebec, an additional form, the TP-1015.3-V Source Deductions Return, must be completed. This Quebec-specific form serves a similar purpose to the federal TD1 for provincial income tax deductions.

Employees should complete these forms, indicating their personal tax credit amounts. Employers then use this information, along with payroll deduction tables or online calculators, to determine income tax deductions for each pay period. Maintaining records of all employee information and completed tax forms is a mandatory requirement for compliance and audits.

Calculating Employee Wages and Deductions

Calculating employee wages and deductions is a key part of payroll processing. This involves determining gross pay, which includes all earnings before deductions, such as hourly wages, salaries, overtime, commissions, and bonuses. Taxable benefits, like a company car or group life insurance, are also included in an employee’s gross insurable earnings for deduction calculations.

Mandatory deductions include contributions to the Canada Pension Plan (CPP), Employment Insurance (EI) premiums, and federal and provincial income tax. The Canada Pension Plan provides contributors with retirement, disability, and survivor benefits. For 2025, the employee and employer CPP contribution rates are 5.95% each, applied to pensionable earnings above a basic exemption, up to a Year’s Maximum Pensionable Earnings (YMPE). A second CPP contribution (CPP2) applies to earnings between the YMPE and the Year’s Additional Maximum Pensionable Earnings (YAMPE), with a 4.00% rate for both employee and employer.

Employment Insurance provides temporary financial assistance to unemployed Canadians. For 2025, the employee EI premium rate is 1.64% on insurable earnings, up to a Maximum Insurable Earnings (MIE). Employers contribute 1.4 times the employee’s premium rate. The income tax deduction is determined using the employee’s gross income and the tax credit amounts claimed on their TD1 forms, referencing payroll deduction tables or online calculators that account for progressive federal and provincial tax systems.

For employers in Quebec, additional provincial plans substitute or complement federal programs. The Quebec Pension Plan (QPP) replaces CPP for Quebec residents, with a 2025 contribution rate of 6.4% on earnings above a basic exemption, up to a YMPE. A second tier QPP contribution of 4.0% applies to earnings between the YMPE and the YAMPE. Furthermore, the Quebec Parental Insurance Plan (QPIP) provides maternity, paternity, parental, and adoption benefits, with a 2025 employee premium rate of 0.494% and an employer rate of 0.692% on insurable earnings up to a maximum.

Beyond these mandatory deductions, other common deductions might include union dues, contributions to registered pension plans, or garnishments. After all applicable deductions are calculated and subtracted from the gross pay, the resulting amount is the employee’s net pay.

Remitting Deductions to the Canada Revenue Agency

After calculating and withholding payroll deductions from employee wages, employers must remit these amounts to the Canada Revenue Agency (CRA) by specific due dates. The frequency of these remittances depends on the employer’s average monthly withholding amount (AMWA). New employers, or those with a low AMWA, may remit quarterly, with payments due by the 15th day of the month following the end of each calendar quarter.

Employers with an AMWA of less than $25,000 are considered regular remitters and must remit monthly, with deductions due by the 15th of the following month. Accelerated remitters, those with an AMWA between $25,000 and $99,999.99, remit semi-monthly. The most frequent remitters, with an AMWA of $100,000 or more, must remit up to four times per month, within a few working days following specific pay periods.

Remittances can be made through several methods. Online banking is an option, allowing direct payments to the CRA through financial institutions. The CRA’s My Payment service also facilitates direct payments using various debit options. Pre-authorized debit arrangements can be set up for automated payments.

Remittances can also be made in person at a Canadian financial institution with a personalized remittance voucher, or by mail with a cheque. Electronic methods are preferred and mandatory for payments exceeding $10,000.

Fulfilling Annual and Periodic Reporting

Beyond regular remittances, Canadian employers have annual and periodic reporting obligations to the CRA and their employees. One annual requirement is the issuance of T4 Slips. These slips detail an employee’s total employment income, Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax deducted for the calendar year.

Employers must provide T4 slips to employees and file them with the CRA by the last day of February following the tax year. Electronic filing is mandatory for employers issuing six or more T4 slips, which can be done using the CRA’s T4 Web Forms or payroll software. Along with the individual T4 slips, a T4 Summary must be filed with the CRA, summarizing the total amounts reported on all T4 slips.

For employers in Quebec, an additional reporting requirement is the RL-1 slip (Relevé 1), which serves a similar function to the T4 slip but reports income and deductions for Quebec provincial tax purposes. These slips also have a February 28 deadline.

Another periodic report is the Record of Employment (ROE), which is required when an employee experiences an interruption of earnings. This document is for employees to apply for Employment Insurance (EI) benefits. An interruption of earnings can occur due to various reasons, including termination, layoff, resignation, or a reduction in insurable earnings. Employers must issue an ROE within five calendar days of the first day of an interruption of earnings or the end of the pay period in which the interruption occurs. ROEs are preferably issued electronically through Service Canada’s ROE Web system.