This article will provide an overview of payroll, a consideration for any business operating in Canada that pays the owners or employees.
Who Needs a Payroll Account?
If you pay salaries, wages, bonuses, or provide taxable benefits (such as automobile benefits), you require a payroll account and a payroll number for your corporation, partnership, or proprietorship.
If you are doing a regular payroll (monthly or bi-weekly, for example), you need to register for the payroll account before your first pay period. Typically, your accountant can set this up for you, or you can call CRA business line and set this up for your corporation.
If your accountant declares a salary once a year, when the year end is completed they will typically have already set up the payroll account and will give you a schedule for remittances required for the remainder of the year.
Calculating Source Deductions
When an individual is paid a salary from a business, the business must take the gross amount of pay, deduct “source deductions”, and pay the individual (whether the employee or yourself) the net amount. Source deductions are made up of three components:
Canada Pension Plan (CPP) contributions: All individuals over the age of 18 and below the age of 65 generally must remit CPP related to the gross pay above $3,500 per annum. This is calculated based on a percentage of the gross pay. There is a matching employer portion that must also be remitted, up to a maximum possible contribution per year. The percentages and maximums change year to year.
Employment Insurance (EI) premiums: Except for shareholders and family members, most individuals have to pay EI premiums based on a percentage of gross pay, to a maximum possible premium per year. There is also an employer portion of the premium. The percentages and maximums change year to year.
Income tax: Based on the employee TD1 forms, or by advice of your accountant, all individuals should remit the employee portion of income tax based on the gross pay. This is calculated based on payroll tables (or through a payroll calculator).
The employee and employer portions would be calculated and remitted to the government. The CRA provides a payroll calculator found at the link below which can aide in these calculations.
How and When to Remit Source Deductions
Most businesses would be classified as a “regular remitter,” in which case the remittance needs to be remitted to the CRA by the 15th of the month following the month when the payroll occurred. In certain cases, a business may fall into being an accelerated remitter if the average monthly withholding amount exceeds $25,000. In this case, remittances are due more frequently, depending on the date the pay occurred. For most small businesses this would not be a concern.
To remit to the payroll account, this can be done by sending a cheque to the CRA with a payroll remittance voucher, paying online through “CRA My Payment” service, or paying through your online banking.
How to File
On a calendar year basis, T4 summaries and T4 slips need to be filed to the CRA by the end of February of the following year. These forms containing the details of the payroll that occurred during the year, and the amount of source deductions that were required to the remitted to the government. The CRA will take this information and apply the filed T4 slips to the employees’ individual tax accounts for purposes of matching to their income tax returns.
If you are not using a payroll provider that does this service for you, we would recommend engaging with an accountant to help with this process, as there could be costly penalties that apply if the filings are done incorrectly or late.
When to Use a Payroll Provider
At Kapasi & Associates, we generally recommend that if a business is employing five or more staff, it makes sense to use a payroll provider. If payroll is done incorrectly, it can lead to costly errors. Companies such as ADP have invested significant resources in creating online platforms to make payroll an efficient and painless process for most organizations. They also have help centres to support you if questions arise. Typically, the cost of this service is nominal compared to the potential time saved and mitigation of errors.
This is just a basic overview of payroll in Canada, and there are numerous other complexities that can arise, particularly when making special types of payments and certain exemptions for source deductions. We recommend discussing your business situation and needs with us to ensure you are compliant with all payroll requirements.