2.4 Federal Legislation – Statutory Deductions

2.4.1 Mandatory Payroll Obligations

In Canada, it is mandatory for employers to register for a payroll account with the Canada Revenue Agency (CRA) if an employee is paid, whether the employee is paid a salary or wages, vacation pay, bonuses, tips, or other kinds of remuneration. An employer can be an individual or an organization. If an employer has already registered for a business number (BN) with the CRA, the employer may add a payroll account to their existing BN account. For information about setting up a payroll account or BN account, see Chapter 1 of this text.

There are serious penalties and consequences for employers who do not fulfil their payroll obligations. For minor errors, such as late payments, employers will likely have to pay interest. The rate of interest is set by the Government of Canada and updated quarterly. If an employer does not remit a required amount, for instance, or if the employer does not remit the employee’s portion of CPP contributions, the employer will likely have to pay both the employer and the employee portions of the CPP contributions due, likely with a penalty ranging from 3% to 20% (Government of Canada, 2023d). Employers that do not comply with CRA requirements to deduct, remit, and report may also face prosecution, which could result in fines of $1,000 to $25,000 or imprisonment for up to 12 months (Government of Canada, 2023a).

2.4.2 Legislation Mandating Source Deductions

The Income Tax Act, Employment Insurance Act, and Canada Pension Plan are federal laws (legislation) that mandate payroll deductions in Canada. These deductions are taken from each employee’s gross pay and remitted to the CRA on each employee’s behalf. In addition to requiring employers to make deductions from employees’ pay, the Employment Insurance Act and Canada Pension Plan also require employers to pay premiums and make contributions. These deductions and employer payments are required by law and are enforced by the CRA. Calculations of source deductions and further explanation is available in Chapter 4.

The Income Tax Act requires employers to withhold federal and provincial income tax from their employees’ pay (Income Tax Act, s.153(1), 2023). Both federal and provincial taxes are administered through the CRA (except for Quebec provincial taxes, which are administered through Revenu Québec (Government of Canada, 2023c). The amount of tax withheld will depend on the employee’s income, the federal and provincial tax rates applicable to that income, and tax exemptions that may be available to the employee. Calculations of tax withholdings can be found in Chapter 4.

The Employment Insurance Act obliges employers to 1) deduct and withhold employee EI premiums from employees’ gross pay, and 2) to contribute employer EI premiums (Employment Insurance Act, s. 82, 2023). Employees’ premiums are set annually, and employers’ premiums are set to 1.4 times the employee premium. Calculations of employee and employer premiums can be found in Chapter 4 and Chapter 6.

Similarly, the Canada Pension Plan requires employers to deduct CPP premiums from employees’ paycheques and match the contribution for remittance (Canada Pension Plan, s. 8 and 9, 2023). Calculations of employee and employer contributions can be found in Chapter 4 and Chapter 6.

References

Canada Pension Plan, RSC 1985, c. C-8. (2023). https://canlii.ca/t/549kp

CNESST. (n.d.). Working conditions. https://www.cnesst.gouv.qc.ca/en/working-conditions

Employment Insurance Act, SC 1996, c. 2. (2023). https://www.canlii.org/en/ca/laws/stat/sc-1996-c-23/latest/sc-1996-c-23.html

Government of Canada. (2024). Hours of work – Federally regulated workplaces. https://www.canada.ca/en/services/jobs/workplace/federal-labour-standards/work-hours.html

Government of Canada. (2023a). Employers’ guide – Payroll deductions and remittances. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4001/employers-guide-payroll-deductions-remittances.html

Government of Canada. (2023c). Provincial and territorial tax and credits for individuals. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/provincial-territorial-tax-credits-individuals.html

Government of Canada. (2023d). Remit (pay) payroll deductions and contributions: When to remit (pay). https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/remitting-source-deductions/how-when-remit-due-dates.html

Income Tax Act, RSC 1985, c. 1 (5th Supp). (2023). https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-1-5th-supp/latest/rsc-1985-c-1-5th-supp.html