Navigating payroll can be complex, but it doesn't have to be complicated.
Payroll is the process of paying employees for their work. It includes calculating wages, withholding taxes, and delivering pay. Payroll also involves keeping records and meeting government requirements.
In Canada, payroll is more than just issuing paycheques. It involves following federal and provincial laws, managing deductions, and staying up to date with changing regulations.
It's a lot to keep track of. That's why we're here to help with answers to the most frequently asked payroll questions.
Let's dive in.
What is payroll and why does it matter?
Payroll is the process employers use to calculate and distribute wages to employees. It includes tracking hours worked, applying wage rates, and accounting for deductions and taxes.
Payroll also involves submitting reports to government agencies and keeping records of payments. These tasks follow specific rules set by federal and provincial authorities.
Key components of payroll include:
- Wage Calculation: Base pay, overtime, commissions, and bonuses
- Tax Withholding: Federal and provincial income taxes, CPP, and EI
- Deductions: Employee contributions to benefits, pensions, and other plans
- Reporting: Records of earnings, deductions, remittances, and year-end forms such as T4s
How do I pay my employees?
Employees can be paid in several different ways. The most common payment methods include:
- Direct deposit: Money is transferred directly into an employee's bank account on payday
- Printed cheques: Physical cheques handed to employees or mailed
- Paycards: Prepaid cards that receive wages electronically
Direct deposit is a popular and secure payment method in Canada. To set this up, employers collect the employee's banking information, including institution number, transit number, and account number.
Each province may have rules about how wages can be paid. Some require employee consent for electronic payment methods. Pay stubs are typically provided with each payment, showing gross pay, deductions, and net pay.
How do I onboard a new employee for payroll?
Onboarding a new employee for payroll begins with collecting their personal and employment information:
- Full legal name
- Home address
- Social Insurance Number (SIN)
- Date of birth
- Banking information for direct deposit
Employees complete a Federal TD1 form and the applicable provincial or territorial TD1 form. These forms determine the amount of tax to withhold from each paycheque.
The employer then sets up the employee in the payroll system with their job title, start date, pay rate, pay frequency, and employment type. The system also tracks vacation entitlements, benefits deductions, and any applicable union dues.
Before processing payroll, the employer verifies the employee's SIN and, if applicable, any work permits for non-residents.
How often should employees run payroll?
In Canada, employers can choose how often to run payroll based on their business operations and provincial rules. Common pay schedules include weekly, biweekly, semimonthly, and monthly.
Weekly pay means employees receive wages once per week (52 pay periods each year). This schedule provides more frequent income for employees but creates more processing work and higher administrative costs.
Biweekly pay means employees are paid every two weeks (26 pay periods each year). This provides a regular schedule while limiting the number of payroll runs. Some months include three pay periods, which can affect budgeting.
Semimonthly pay means employees are paid twice per month on the same days, such as the 15th and the last day of the month (24 pay periods each year). This creates a consistent schedule with fixed dates.
Monthly pay means employees receive wages once per month (12 pay periods each year). This reduces administrative tasks but requires employees to manage expenses across a full month.
What is payroll compliance?
Payroll compliance means following all laws that apply when paying employees. In Canada, this includes rules about:
- Income tax withholding
- CPP and EI deductions
- Employment standards
- Reporting deadlines
- Recordkeeping requirements
Employers calculate and deduct required amounts for CPP, EI, and income tax, then remit these to the Canada Revenue Agency (CRA) on time.
Provincial employment standards govern minimum wage, vacation pay, and overtime. These standards vary by province or territory.
Maintaining compliance also includes submitting reports like T4 slips and Records of Employment (ROEs). Employers keep payroll records for several years as required by law.
What is the difference between gross and net pay?
Gross pay is the total amount an employee earns before any deductions are made. It includes regular wages or salary, plus any overtime, bonuses, or other earnings.
Net pay is the amount the employee takes home after deductions. This is the pay that is deposited into their bank account or given by cheque.
For example, if an employee earns $4,000 in a month, that is their gross pay. If $800 is subtracted for taxes and benefits deductions, the net pay is $3,200.
Common deductions that reduce gross pay to net pay include:
- Income tax (federal and provincial)
- Canada Pension Plan (CPP) contributions
- Employment Insurance (EI) premiums
- Group benefits premiums (e.g., health or dental)
- Union dues, if applicable
- Garnishments, if ordered
Which earnings are vacationable per CRA guidelines?
Under the Canada Revenue Agency (CRA) guidelines, vacationable earnings are types of pay that are used to calculate vacation pay entitlements. These earnings form the basis for how much vacation pay an employee receives.
Vacationable earnings typically include:
- Regular wages or salary
- Overtime pay
- Commissions
- Bonuses tied to work performance
- Most taxable benefits
Non-vacationable earnings generally include severance pay, retiring allowances, reimbursement of expenses, or gifts and prizes not related to work performance.
Each province or territory may apply additional rules, but federally regulated employers follow the standard set by the Canada Labour Code and CRA.
How is vacation pay paid out?
In Canada, vacation pay can be paid in two main ways: either on every paycheque or when the employee takes vacation time.
When vacation pay is paid on each cheque, a percentage—usually 4% for employees with less than five years of service—is added to each pay. This method is common for part-time, casual, or contract workers.
When vacation pay is paid when vacation is taken, the employer sets aside the vacation pay and pays it out when the employee takes time off. This method is more common for full-time employees who earn vacation days over time.Employers list on the pay statement how vacation pay is calculated and when it is paid. The rules may vary by province or territory.
How is statutory holiday pay for employees determined?
Eligible employees are entitled to be paid an average day’s pay on statutory holidays and on a day off in honour of a statutory holiday (if the stat holiday falls on a regular day off).
An average day’s pay is calculated differently for each province.
Can employers give paid time off instead of overtime pay?
An employee and an employer can make an agreement in writing that the employee will receive paid time off (PTO) instead of overtime pay when they work extra hours. This is referred to as "time off in lieu" or “banked time”.
If an employee has agreed to bank their overtime hours, they must be compensated at the rate of time and a half (1.5 hours) of PTO for each hour of overtime worked. Typically, paid time off must be taken within three months of the week in which the overtime was earned.
When do I report payroll remittances to the CRA?
If your payroll software doesn’t automatically submit remittances to the CRA on your behalf, you’ll need to send them to the CRA according to their submission schedule.
The deadlines vary depending on your average monthly withholding amount. Penalties will incur for missed deadlines.
Are taxable benefits subject to EI and CPP deductions?
Yes. If an employer provides a taxable benefit to an employee, the employer must calculate the value of the benefit, calculate the proper payroll deductions for the taxable benefit, and file an information return.
Bonuses, incentives, awards, and gifts are also considered taxable earnings and, unless stated otherwise, are subject to CPP, EI, and tax deductions. If paid in kind, the value is subject to CPP and taxes but not EI.The Employers’ Guide to Taxable Benefits and Allowances informs employers on which taxable benefits are subject to CPP and EI withholdings along with the codes that are required to report them on the employee's T4.
When do I need to distribute T4 slips to my employees?
Employers are responsible for preparing T4 slips for all of their company’s current and previous employees who received income during the tax year. T4 slips must be sent out via mail by February 28th.
If opting to go the paperless route, you must have an employee’s written permission for them to receive their T4 electronically.
When is an employer required to issue a Record of Employment (ROE)?
An employer is required to issue a Record of Employment (ROE) when an employee experiences an interruption in earnings. This happens when an employee stops working and receives no insurable earnings for seven consecutive calendar days, or when their salary falls below 60% of their regular weekly earnings.
Common situations that require an ROE include:
- Termination of employment
- Resignation
- Retirement
- Layoff
- Unpaid leave (parental, maternity, sick, or compassionate care)
- Injury or illness that interrupts pay
- Change of Payroll provider
- Change of Pay frequency
The ROE is used by Service Canada to determine whether a person qualifies for Employment Insurance (EI) benefits.
What information is needed for an ROE?
To complete a Record of Employment (ROE) accurately, employers need specific details about the employee and their job:
Personal information:
- Full name
- Social Insurance Number (SIN)
- Contact information
Employer details:
- Business name
- Payroll account number
- Address
Employment information:
- First and last day worked
- Final pay period ending date
- Reason for issuing the ROE
The ROE also requires a breakdown of the employee's insurable earnings and hours for each pay period before the interruption of earnings. If there are special payments like vacation pay or severance, those are recorded separately.
How do I submit an ROE to Service Canada?
Employers can submit a Record of Employment (ROE) to Service Canada either electronically or by paper.
For electronic submission, the employer logs into ROE Web through a My Service Canada Account, fills out the required fields, and submits the form online. Employers using compatible payroll software can also upload ROEs directly if it integrates with ROE Web.
For paper submission, the employer completes a paper ROE form and provides copies to both the employee and Service Canada. Paper ROEs can be ordered from Service Canada.
An electronic ROE is automatically sent to Service Canada and made available to the employee through their My Service Canada Account. A paper ROE requires the employee to submit a copy to Service Canada manually if applying for EI benefits.
What are common payroll deductions beyond CPP, EI, and income tax?
In Canada, payroll deductions include more than just the standard government requirements. These common payroll questions help clarify what might appear on a pay stub.
Additional deductions may include:
- Union dues: Collected from employees who are members of a union
- Group benefits premiums: Health, dental, vision, life insurance, and disability coverage
- Retirement contributions: Pension plans or group RRSPs
- Wage garnishments: Court-ordered deductions for debts, unpaid taxes, or child support
- Charitable donations: Voluntary deductions for registered charities
- Loan repayments: Repayment of advances or loans from the employer
Each deduction is itemized on the employee's pay statement.
What are common payroll processing errors to avoid?
Several mistakes can happen when processing payroll:
Data entry errors:
- Incorrect Social Insurance Numbers
- Wrong birth dates or addresses
- Outdated tax tables
Classification issues:
- Misclassifying employees as independent contractors
- Not recognizing overtime thresholds
- Forgetting to apply the correct overtime rate
Timing problems:
- Missing payroll deadlines
- Late remittance of source deductions
- Poor tracking of hours worked or vacation accrual
Status changes:
- Ignoring terminations, leaves, or promotions
- Not updating payroll settings when changes occur
- Forgetting to issue a Record of Employment
Regular verification and reconciliation help catch these issues before they become larger problems. With this list of questions and answers we’ve compiled, you’ll be better able to identify potential trouble spots.
What is the offboarding process for payroll?
The offboarding process for payroll involves several key aspects when an employee's employment is terminated.
When an employer-initiated termination occurs, payroll professionals face challenging tasks to ensure compliance with legislated notice and severance pay.
Key components and considerations for payroll in the offboarding process include:
Payment of wages on termination
Employers must pay all final wages within specific timeframes, which vary by jurisdiction:
- Regular wages: The timeframe for regular wages varies by jurisdiction. For example, in British Columbia, it's within 48 hours, while in Ontario, it's within 7 days after the termination date or the employee's next payday, whichever is later.
- Pay in lieu of notice: This is required when an employee is not permitted to work their legislated notice period. These payments are subject to statutory deductions like CPP (but not QPP) contributions, EI premiums, QPIP premiums, and federal/Quebec provincial income tax, and are reported on T4 and RL-1 slips.
- Vacation pay: Vacation pay must also be paid out within specific timeframes depending on the jurisdiction.
Severance pay
In Canada, only employees covered under the Canada Labour Code, Part III or Ontario's Employment Standards Act, 2000, may be entitled to legislated severance pay in addition to notice requirements, based on their years of service and other factors.
Severance payments are generally not subject to CPP/QPP contributions or EI/QPIP premiums but are subject to income taxes.
Reporting termination pay on pay statement
Each element of the termination payment, such as wages in lieu of notice, severance, or retiring allowance, should be reported separately on the pay statement to prevent misinterpretation and protect the employer.
Payment when employee cannot be located
If a terminated employee cannot be located, the final pay may need to be remitted to the Minister or Director of employment/labour standards in certain jurisdictions.
Benefits
If a company offers a benefits program, these benefits may need to continue during the notice period, depending on the employment contract or company policy/collective agreement.
Employers are usually required to inform employees about their 30-day conversion option for life insurance coverage.
Records of Employment (ROEs)
Completing the Record of Employment (ROE) is part of the termination process. Visit Service Canada for how to complete an ROE.
Which software systems can help process payroll?
Integrated HR and payroll software systems connect various workforce management functions. These systems:
- Link payroll with time tracking, benefits, and employee records
- Reduce manual data entry and potential errors
- Automatically apply tax updates and legislative changes
- Generate required government reports
When evaluating these systems, consider whether they:
- Follow Canadian payroll laws
- Adapt to provincial variations
- Protect sensitive employee data
- Offer reliable customer support
Rise offers an integrated platform designed specifically for Canadian businesses. Our software connects payroll with HR and benefits for an all-in-one solution that ensures accurate reporting —and saves your organization time, too.
Taking the next step with payroll
Payroll involves many moving parts, including gross versus net pay, vacation pay, overtime, statutory holidays, and deductions.
Whether you’re a team of one or have a dedicated payroll department, making sure that your organization’s payroll function is consistent and accurate takes time.
Rise can help you navigate and automate your payroll processes with accuracy and efficiency. Rise brings payroll, HR, benefits, and time management together in one place for Canadian businesses.
Ready to simplify your payroll process? Book a free demo today with our Rise team.
