Payroll Process for Canadian Companies

Hire an Employee 

The success of every organization lies in the effective hiring of employees certainly. It is equally important to make sure they are paid timely and correctly. We understand paying employees can be a nightmare for many businesses as it involves legal, financial, and tax implications. Any mistake may lead to financial penalties and legal consequences as you deal with various stakeholders such as CRA, employees and their lawyers, the Ministry of Labor, the Workplace Safety and Insurance Board (WSIB), and others. 

Don’t worry. Here is your guide on correctly processing the payroll and your responsibilities as an employer. 

Get the Necessary Information

When hiring employees, you need to have the following minimum information:

• Full name– match it with the official documents. 
• Address
• Social insurance number (SIN)
• Date of hire and date of birth
• Amounts to be paid (this includes salaries, wages, and bonuses)
• Pay type: salaried or hourly, taxable benefit (both cash and non-cash)
• Required deductions. 

Get your employees to fill out federal and provincial form TD1. 

Register Your Business for Payroll

If you already have a business number, register your payroll account with the CRA before you can pay your employees. A payroll program account is a 15-digit number that contains your nine-digit BN.

 Here are the ways to open the payroll account:

• To fill out an RC1 form.
• CRA online services. 
• CRA business helpline at 1-800-959-5525

Workplace Safety and Insurance Boards

Find out if you need to register with WSIB in your province. WSIB coverage isn’t mandatory for every business in Ontario. The Government of Ontario decides which industries and which types of employees have to have WSIB coverage and lists them in the Workplace Safety and Insurance Act (WSIA). Premium will vary according to the nature of the industry, risk, location, and work environment. 

If a business doesn’t require coverage but wants it, they can apply for coverage for their employees.

Employer Health Tax (EHT)

Employee health tax varies from province to province. In Ontario, it is your responsibility to register for an EHT account with the Ontario Ministry of Finance if you are an employer who a) is either not eligible for the tax exemption or b) eligible for the tax exemption, but your payroll exceeds your allowable exemption. Usually, small businesses are exempt from EHT in Ontario. 

Decide on Payroll Frequency

Before you open your payroll account with the CRA, you need to decide on the frequency of payroll. There are various payroll frequencies, and you need to select a suitable frequency based on your specific business situation, cash flow, and, of course, employees’ expectations. 

Here are the most common payroll frequencies:

• Weekly: Not very frequent, typically used in small business setups. 
• Biweekly: Bi-weekly is the most common payroll schedule in Canada. In this schedule, workers get paid every two weeks on the same day (say Friday). This frequency is most common for the staff paid on hourly wages. 
• Semi-Monthly: This is the second most common payroll schedule. Employees get paid on the 15th and last day of this schedule each month. This is mainly used for salaried employees. 
• Monthly: This schedule is not very frequently used. It is more suitable where salary or compensation is based on monthly performance or in the case of owner-managers. 

Employer’s Responsibilities During Payroll Processing

Employers are responsible: –

1. To determine gross salary, including all wages, bonuses, commissions, allowances, and non-cash taxable benefits. 
2. To correctly calculate and deduct federal income tax, applicable provincial tax, Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP) contributions, and Employment Insurance premiums (EI) from an employee’s salary. 
3. For other deductions, if a company has other plans/deductions, such as union dues or contributions to a Registered Retirement Savings Plan (RRSP). 
4. To contribute an amount in addition to the employee’s contribution to CPP and EI, Employees Health Tax, WSIB payment, etc.

Choosing the Payroll Processing Method 

Manually (self-processing)

You can use the manual calculation if you know payroll rules and have a small payroll to process. Here is why we don’t recommend it. 

People use this method because it looks cheap, but it often proves to be more expensive. Firstly, it takes more time to process it. Secondly, any mistake may result in reprocessing, interest, penalties and may cause CRA to audit you. 

CRA’s online payroll calculator is a good resource if you don’t have any software. However, even though this resource gives you information for the current period, it will not track year-to-date information. In most cases, companies take their data to accountants, in the end, to clean up and reconcile. 

Finally, you would need an accountant to issue year-end payroll reports, i.e., T4 Summary and ROEs. This may cost more money and time.

Online Payroll System (self-processing)

Another option is to use online payroll software like QuickBooks, Wage Point, and ADP. Most of these provide good resources, but each has pros and cons. What is good for one business may not be a good fit for another. 

Even with good software, you need to have a solid understanding of payroll laws; otherwise, you are unsure if you fully comply with the law. 

Outsourced Payroll Provider

Various accounting companies provide payroll processing services and set you free from self-processes. Besides providing technical and legal support, they ensure compliance with payroll regulations and standards and avoid possible litigations with employees.

These firms can offer full automated service, which includes direct payment to employees from the company account to employees account and from company bank account to the CRA.

The cost, reporting, and convenience offered by each service provider vary, and you must choose what is right for you based on the support you need, the size of your payroll, and the desired convenience. But keep in mind that as an employer, you are responsible for accurate calculation and processing of the payroll, so be careful in selecting the right accounting partner. 

Remitting Deductions to the CRA

The amount of taxes and other dues deducted from employees’ salaries plus the employer’s contribution are to be remitted to the CRA, called payroll remittances, at a frequency determined by the CRA threshold formulas. Most small and medium-sized businesses will fall in the category of regular remitters, i.e., you need to remit the amount to the CRA by the 15th of the following month. However, some businesses may qualify for quarterly remittance or accelerated through, i.e., every 15 days. 

CRA may also adjust (up or down) your frequency based on your remittance history and compliance. 

Paying Your Employee

Equally important is the timely payment to the employee. How you pay your employees will depend on you, your organizational structure, and your chosen software processing option. 

Here are the most common ways of paying employees.

• Email transfer or E-transfer. This method is popular in small business. It is good in terms of convenience and speed, but unsuitable for when you have more employees. Also, most banks have payment limits, which make it unfit even for small businesses. 
• Cheques: Traditional method; most businesses are moving away from this because of administrative issues; it takes time till the payment reaches the employees. 
• Electronic Funds Transfer: This method used by most companies involves taking payment from the employer’s account and depositing it to the employee’s account directly. Various service providers take care of it, and accounting companies like QuickBooks can manage this for you. This method is efficient and free from hassle and mistakes. Normally, you must process your payroll 2-3 days before the pay date. 

T4 Slips, T4 Summary and Annual Information Returns

You must file T4 Slips for each employee and T4 summary return each year as an employer. You also need to provide a copy of T4 to each employee summarizing total pay, taxes, CPP, EI, and all other benefits and deductions they would need for personal tax filing. Except for small businesses, CRA requires employers to file the T4 return electronically using either web form or payroll software. 

Record of Employment or ROE

An employer must issue a record of employment (ROE) when an employee leaves an organization (resigns, quits, etc.) or there is an interruption of earnings, say because of sickness, injury, or maternity reasons. ROE is issued on a specified format with the Service Canada. Employers have five calendar days after the end of the last pay period. ROE can be issued on paper as well. However, Service Canada encourage businesses to issue it electronically, and it’s much more convenient and accurate using software. 

Record Keeping:

Record keeping is essential for payroll, business bookkeeping, or personal filing. But when it comes to payroll, record keeping is more critical, as you might need to provide information to various regulators/organizations such as CRA, Service Canada, employees or their lawyers, provincial labor standard enforcement agencies, WSIB board, etc. CRA might audit you, and you will have to access the information. Make sure it is easy to access as well as safe. 

If you are looking for hassle-free payroll processing and timely payment to employees and CRA, a Source Accounting Professional Corporation professional will be able to assist you. Book a consultation call by calling at 647-930-8130 now. 

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.