Running payroll in Canada

Employment standards and payroll requirements in Canada are regulated both on federal and on provincial level, which can make payroll processing quite complicated for employers with remote teams scattered over different provinces. While rules and processes in most provinces are in line with federal regulations, there are significant differences when processing payroll in Quebec - especially since the province operates its own social security schemes.

When setting up their local payroll in Canada, employers have to complete the following steps: 

• Register with the Canada Revenue Agency (CRA) for payroll purposes to obtain a payroll program account number - this includes registration for the federal pension scheme

• Register with the provincial tax authorities for payroll tax - only if applicable

• Register with the provincial workers’ compensation scheme - only if applicable

Please note that employers based in or with employees in Quebec are required to register with Revenue Quebec (RQ), which also implies registration for the Quebec Pension Plan (QPP). Although foreign employers can hire employees in Canada without establishing a legal entity in one of the provinces, they still have to register with the Canadian authorities. In case a local legal entity is established, it is necessary to follow the regulations and procedures imposed by the respective province.  

When hiring a new employee, employers must make sure to obtain the employee’s social insurance number (SIN). New hires also need to fill out the TD1 form (personal tax credits return) which informs the employer about the amount of tax that needs to be deducted.

Canada’s income tax and social security system consists of federal and provincial components. While there is a general federal standard applicable in almost all of the Canadian provinces, each province or territory is allowed to set state-specific rules and fix additional contributions. 

Tax considerations

Employment income is subject to federal and provincial income tax. Federal income tax rates range from 15% to 33% while provincial income tax rates go up to 25.75% - plus an additional surcharge levied by some provinces. There is an alternative minimum tax (AMT) of around 25% (combined federal and provincial tax) which applies where the calculated AMT levy exceeds the tax levy calculated under the standard tax system.

Taxable income is defined as wages and salaries as well as employee benefits - including most fringe benefits. Deductible items include contributions to registered pension funds, childcare and medical expenses, charitable donations as well as certain relocation and professional expenses. Tax relief for these expenses is provided in the form of special tax credits - instead of personal allowances. Quebec has separate rules for deductions and for determining taxable income. 

It should be noted that some provinces levy an additional health-related payroll tax on employers. For more information, see the section on social security contributions below. In Quebec, large employers with a total payroll sum of more than CAD 2,000,000 must further contribute to a labor standards fund. 

Canadian residents are taxed on their worldwide income while non-residents are only liable for income tax on Canada-sourced income (including employment in Canada). However, there are foreign tax credits which can be offset against income tax payable in Canada. An individual is considered a Canadian tax resident if they spend more than 183 days in Canada during any given tax year. Further determining factors include significant social and professional ties to Canada as well as having a fixed abode in the country.

Tax withholding and reporting 

It is the employer who withholds income tax from employee salaries and wages and remits the withheld amounts to the federal tax authorities. Except for Quebec, federal and provincial taxes are calculated in one single process and collected through the federal tax authority which is the Canada Revenue Agency. Qualifying non-resident employers may be exempt from withholding income tax from wages and salaries paid to non-resident employees. 

There are several remitter types which determine the frequency with which withheld (federal and provincial) income tax needs to be paid to the tax authorities. Depending on the average withholding amount, employers are required to remit withheld income tax quarterly, monthly or semimonthly. In some cases, income tax may even have to be submitted four times a month. For more information on remitting frequency, check the CRA’s website. 

Payroll information returns must be submitted on an annual basis. The due date is the last day of February of the following year. The necessary report is the T4 form - Quebec has a different return form (RL-1). The return consists of a summary of employment income paid as well as an annual overview of payments and contributions made for each employee. A copy of the individual employee report must be sent to the respective employee. 

The tax year is the same as the calendar year. Individual tax returns (no joint filing is permitted) are due by 30 April. 

Social security contributions

There are two main social security obligations employers have to fulfill on the federal level, i.e. making contributions to a pension plan for their employees and paying for employment insurance. The latter covers payments during maternity and parental leave, sickness and more. 

Contributions to the Canada Pension Plan (CPP) are currently (as of March 2022) set at 5.7% for both employee and employer. However, contributions are only levied on employment income of up to CAD 64,900, i.e. payments are capped at CAD 3,499.80. It is worth noting that Quebec has its own pension scheme, which is the Quebec Pension Plan (QPP). Under the QPP, employers and employees contribute 6.15% each - up to a maximum contribution of CAD 3,776.10. Under both schemes, income of up to CAD 3,500 is exempt from contributions. 

In 2022, the contribution rates for the Employment Insurance (EI) are set at 1.58% for employees and 2.21% for employers. Rates in Quebec are different (1.2% for employees and 1.68% for employers) as the province has introduced a separate parental insurance scheme (Quebec Parental Insurance Plan (QPIP)) employers must also contribute to. The maximum insurable income is set at CAD 60,300. 

Special payments made to employees may be exempt from social security contributions. The Canada Revenue Agency publishes a comprehensive special payments chart showing whether contributions need to be made or not. CPP and EI contributions are paid to the Canada Revenue Agency together with the withheld amount of income tax. QPP payments must be remitted directly to the provincial tax authority which is Revenue Québec (RQ). 

In addition to these mandatory federal social security contributions, employers are required to pay a separate health tax (EHT) in some provinces. Payments go towards funding the provincial universal healthcare system. Provinces which currently levy this tax are British Columbia, Manitoba, Newfoundland and Labrador, Ontario, Quebec and the Northwest Territories and Nunavut. In the Northwest Territories and Nunavut, this levy takes on the form of a standard payroll tax amounting to 2% of the employee’s salary. Health tax contributions in the other provinces vary between 1.95% and 4.3% (top rates). 

Some provinces also operate a workers’ compensation fund employers must contribute to. Contribution rates vary depending on the employer’s payroll sum, industry sector and other factors. 

* Contribution rates and caps are different in Quebec, plus there is an additional parental insurance contribution in Quebec.

** Certain states levy an additional Employer Health Tax to fund the provincial health system. Further contributions may include payments towards a provincial workers’ compensation scheme.

Employees in Canada are entitled to various benefits. These include:

• Annual leave and public holidays: at least 2 weeks (depends on the province) with vacation pay of at least 4%, plus 6 to 10 public holidays 

• Maternity leave: subject to provincial employment standards; under federal law: 15 weeks paid via statutory benefits equal to 55% of the employee’s wages (capped at CAD 638 per week)

• Paternity leave: usually part of parental leave (subject to provincial laws)

• Parental leave: up to 40 weeks (maximum 35 weeks for one parent) paid at a 55% rate (capped at CAD 638), or up to 69 weeks (maximum 61 weeks for one parent) paid at a 33% rate (capped at CAD 383)

• Sick leave: generally no obligation for employers to provide paid sick leave, but legislation is due to change in the months to come to include up to 10 days of paid sick leave per year; 17 weeks of unpaid sick leave under federal law

For more information on employee benefits and other employment requirements in Canada (including severance pay and termination procedures), check out our Global Hiring Guide.

Minimum wages in Canada vary between provinces, but there is a federal minimum wage which is currently (as of March 2022) set at CAD 15.00 per hour. Provincial hourly minimum wage rates range from CAD 11.75 to CAD 16.00. Overtime rules are also subject to provincial legislation, but most provincial regulations mandate employers to compensate overtime work at a rate of 150% of the employee’s usual wages. Work on public holidays must also be remunerated by additional pay. There are no legal provisions regarding the payment of an annual bonus. 

Pay frequencies in Canada vary greatly and employers can choose between paying their employees once a week, once every two weeks or twice every month. Payments can be made either in cash, by check or via bank transfer. At the end of each pay period, employees should be provided with a payslip containing detailed information regarding: 

• Pay period

• Pay rate

• Gross pay

• Net pay

• Deductions

• Benefits

• Garnishments (if applicable) 
  

Both paper and digital payslips are legally accepted. Payroll records must be kept for at least 3 years.