Expanding your business into another country is a big deal for most business owners. You may feel your business has “made it” when you begin expanding internationally.
When you start crossing borders, you’ll likely have to hire a few employees. Whether you conduct payroll yourself at home or outsource this task, you’ll quickly realize Canadian payroll presents new challenges and opportunities for your business.
You need to know how Canadian payroll and taxes work. With this knowledge in hand, you can either conduct payroll in an error-free way or keep up with what your Canadian payroll provider is doing to ensure tax efficiency for your business.
This crash course in Canadian payroll 101 will help you get up to speed in no time.
Payroll 101: The Basics of Canadian Payroll
Conducting payroll is more than determining an employee’s wages, then writing them a cheque. You must make the appropriate deductions. In the US, this includes federal and state taxes, Social Security, and more.
In Canada, the situation is similar. You’ll still have to calculate an employee’s wages, then make the appropriate payroll tax deductions. These include federal and provincial income tax. You’ll also need to collect Employment Insurance and Canada Pension Plan dues.
The taxes you collect from Canadian employees’ paycheques must be remitted to the Canada Revenue Agency (CRA).
Setting up Canadian Payroll
Before you can conduct payroll, you must collect a few pieces of key information for your Canadian employees. Once you’ve made a hire, you’ll need to get the employee’s social insurance number (SIN). They’ll have to complete the federal and provincial TD1 form.
You’ll also require a business number from the CRA. Once you have this number, you can set up your payroll system to send remittances.
At the end of the year, you’ll report how much tax you collected on a T4 or T4A slip. You must provide one to each employee by the deadline set by the CRA.
The CRA also determines how much tax to collect from employees based on their classification. For example, you’ll collect different amounts of tax from full-time employees versus a contractor.
Avoiding Payroll Errors
As in the US, payroll remittance errors could cause problems for employers of any size. Even a simple calculation error could mean the CRA will penalize you.
You must collect deductions every pay period. The pay stubs you supply to your employees must clearly indicate how much you deducted from each individual income source. If someone earns a base salary, plus commission, you have to indicate how much you’ve deducted from each one.
You can check how much you should be deducting for EI, CPP, and income tax by checking the provincial tables. You can also use a deduction calculator.
Check for Exceptions
Canadian payroll becomes even more complex when you realize there are exceptions to the rules. For example, employees under the age of 18 don’t qualify for CPP. If an employee is over the age of 70, they also can’t contribute to the government-operated pension plan. There may also be exceptions for EI.
Depending on which province you operate in, there could be other deductions you’ll have to calculate. Holiday pay is one example.
You might also be required to provide certain leave days, such as bereavement days. You’ll need to check provincial law to determine how much you need to pay, if at all. You’ll also be required to create a vacation fund for most employees, often equivalent to a percentage of their salary. This money is employer-funded and allows the employee to take their paid vacation entitlement.
Learning Canadian payroll and taxes takes time. It’s one of the reasons many international employers choose to outsource. Third parties and payroll companies have the knowledge and latest technology to handle payroll on time. You can trust their expertise to get the job done properly.