Are you a new entrepreneur working to get into the payroll taxes? Well, we can understand that it's a complicated subject, especially for small businesses, so we've put together this manual.
Canadian businesses seeking long-term success must manage payroll correctly from the start. This includes CRA requirements, including payroll deductions (excluding Quebec enterprises with different restrictions). But what are payroll remittance and what are their types? How should Canadian employers process payroll? This manual will help you comprehend the payroll process, whether you're a business owner attempting to pay your employees properly or an employee trying to figure out where your money is going.
What is Payroll Remittance?
When a Canadian business pays wages or benefits to an employee, business owners must remit a certain amount to the Canadian Revenue Agency (CRA).
Employers are responsible for withholding and remitting to CRA all applicable taxes from employee salaries, wages, and other taxable benefits. Remunerations encompass all forms of wage and benefit payments made to employees, whether mandated by law or not. Income from pensions, bonuses, commissions, and other taxed sources are included.
Mandatory deductions
Depending on the company's remitter status, these amounts must be computed and withheld from employees' taxable income before being remitted to the CRA periodically.
- Employees Canada Pension Plan (CPP)
- Employment Insurance (EI)
- Federal and Provincial Income Tax
Step-by-step guide for calculating deductions for each employee
- Find your contribution type:
To manage payroll; you need a CRA account. Before registering, determine your contributing status—employer, trustee, or payer—
- Employer: A person who pays salaries and other benefits to employees.
- Trustee: Manages, distributes, or handles another's property, business, estate, or income.
- Payer: Pays various forms of income associated with employment, such as pensions, lump-sum payments, and commissions for self-employed work.
- Create an account with the Canada Revenue Agency
To legally operate in Canada, businesses must set up a payroll program account with the Canada Revenue Agency (CRA). This account is necessary for tax and other governmental payments to be made by an employer.
- Fill in the necessary information for employees
Employee's SIN, Personal Tax Credits Return, and a completed Form TD1 will be needed to set them up for payroll account.
- Calculate deductions
You can use a manual calculator or the CRA's online deductions calculator to determine payroll deductions and contributions.
- Pay taxes and submit an annual report
For deductions, you'll need to find out your remitter type (i.e., quarterly, regular, threshold 1 accelerated, or threshold 2 accelerated), which depends on your average monthly withholding amount (AMWA).
Lastly, Finalise and submit a CRA year-end summary of employee pay and deductions (Reyes, 2022).
Types of Remitters:
Regular remitter
If you meet these criteria, you are considered a regular remitter (not an accelerated remitter):
- If you have been an Average monthly Withholding Amount (AMWA) employer for less than two years
- Earn less than $25,000 in AMWU over two years.
Quarterly remitting for new small employers
Payroll deductions can be submitted quarterly (once every three months) rather than monthly for the first year if you are a new small employer who will be paying compensation (Agency, 2022).
If you fulfill both of the following requirements, only then will you be considered eligible:
- You have a Monthly Withholding Amount (MWA) that is less than $1,000 each month.
- Your record of compliance needs to be corrected.
*Your Monthly Withholding Amount (MWA) is the sum of all payroll deductions, including CPP, EI, and income tax, plus your part of CPP and EI for the month*
The quarters are as follows:
- The period from January to March.
- The period is from April to June.
- The period is from July to September.
- The period from October until December.
The deductions must be paid on or before the 15th day of the month immediately following the conclusion of each quarter. The deadlines are April 15, July, October, and January (Agency, 2022).
Accelerated remitter
Accelerated remitters are divided into two groups.
- Threshold 1: Employers with a two-year AMWA between $25,000 and $99,000
Threshold 1 remitters must pay payroll processed in the first 15 days of the month by the 25th of the same month. For payrolls processed after the 16th of the month, remittances and payments are due by the 10th of the month (Agency, 2022).
- Threshold 2: Employers with a two-year AMWA above than $100,000
Threshold 2 remitters must pay on the third working day (excluding Saturdays, Sundays, and public holidays) after the 1st- 7th, 8th- 14th, 15th- 21st, and 22nd- last day of the month. To put it another way, the payment must be processed by the third business day after the week in which the payroll was processed (Agency, 2022).
To avoid incurring penalties, remitters at the Threshold 2 level are expected to make their payments and remittances through a financial institution at least one full day before their due date.
Remittance Payment Methods
Methods of payment may include:
- You can do it either online or via phone.
- Using the CRA's My Payment service with a Visa Debit or Interac card.
- Prepaid debit card.
- Outsourced services, such as those provided by a payroll bureau.
- With a specialized remittance voucher at a bank.
- Wire Transfer for Non-resident
Remittance forms
The following are some of the tools that are utilized during the process of remitting payments:
- Regular, quarterly, and monthly depositors should use Form PD7A, Remittance Voucher - Statement of Account for Current Source Deductions.
- Statement of Account for Current Source Deductions (Form PD7A(TM)) or Remittance Voucher (Form PD7A(RB)) for Accelerated Remitters (if applicable) (Agency, 2022).
Penalties on late/failure to submit remittance:
Your payroll deductions, also known as source deductions, must be maintained in trust within an account distinct from your regular operating account. If payments are missed or made late, there will be a fine, and there will also be daily compound interest added to any outstanding sum that is more than $500 (Mire, 2023).
The current penalty structure of the Canada Revenue Agency (CRA) is as follows:
- A penalty of 3% will be imposed on payments that are delayed by 1-3 days.
- A penalty of 5% will be imposed if the payment is delayed by 4-5 days.
- A penalty of 7% will be imposed on payments delayed by 6-7 days.
- A penalty of 10% will be imposed if the payment is delayed by more than 7 days or if no payment is made.
- A penalty of 20% is imposed for instances of recurring failures and infractions.
Keeping Records
Starting a payroll in Canada requires retaining all relevant business records and information in one easily accessible location. Unless otherwise authorized by the CRA, all payroll-related documents must be stored at your Canadian business or residence.
Key Pointers
- Payroll remittance is withholding and remitting taxes from employee wages in Canada.
- Mandatory deductions include Employment Insurance (EI), Employees Canada Pension Plan (CPP), and Federal and Provincial Income Tax.
- Steps to calculate deductions include determining your contribution type, creating an account with the Canada Revenue Agency (CRA), filling in necessary employee information, calculating deductions, paying taxes, and submitting an annual report.
- Types of remitters include regular remitters, quarterly remitters for new small employers, and accelerated remitters (Threshold 1 and Threshold 2).
- Methods of payment for remittance include online or phone, using the CRA's My Payment service, prepaid debit card, outsourced services, specialized remittance vouchers at a bank, and wire transfers for non-residents.
- Penalties for late or failure to submit remittance include fines and daily compound interest.
- It is essential to keep records of payroll-related documents and information in an easily accessible location.
References:
Agency, C. R. (2022, November 1). Employers' Guide – Payroll Deductions and Remittances. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4001/employers-guide-payroll-deductions-remittances.html#P1428_154226
Mire, M. (2023, March 20). Payroll remittances and deductions: A definitive guide. https://wagepoint.com/blog/what-you-need-to-know-about-your-payroll-remittance-schedule/#:~:text=Payroll%20remittances%20in%20Canada%20refer,Employment%20Insurance%20(EI)%20premiums.
Reyes, W. (2022, April 5). Calculating payroll deductions in Canada - humid blog. https://www.humi.ca/blog-post/calculating-payroll-deductions-in-canada