Canadian Payroll Taxes - an Overview

Navigating Payroll as a Canadian Business - September 2024

Understanding the Canadian payroll tax system is crucial to avoiding costly mistakes.

When you’re building, hiring, or expanding your business into Canada, one of the biggest challenges you may face is navigating the intricate federal and provincial payroll tax landscape. With so many rules and regulations surrounding tax withholding, employee contributions, insurance, tax collection, remittance, reporting, and payments - each varying across the country’s different provincial jurisdictions - it's easy to feel overwhelmed and make costly errors. 

We discuss payroll tax penalties in another article - we are keeping this article as ... optimistic as possible. However, keep in mind the following:

• penalties for payroll tax mistakes are very steep and are rarely waived

• penalties have virtually no grace period before they apply (even if you are one day late, steep penalties are assessed)

• penalties are taken very seriously by taxing authorities.

When it comes to payroll taxes, it is always better to get some good advice upfront, and plan carefully.

This article offers a straightforward overview of essential payroll information to consider, outlining the mandatory rules that are important to understand. 

Key Components of Payroll Taxes

Payroll administration encompasses various taxes and contributions that employers must withhold from their employees’ wages and remit to the government, including employer obligations to fund additional taxes and levies in many cases. 

As a business, it will be your responsibility to accurately calculate these amounts based on your employees’ wages, account for your own share of the taxes, and ensure timely remittances and filings. 

Here are the mandatory taxes and contributions you need to consider:

Canada Pension Plan (CPP) Contributions:

Purpose: Both employers and employees contribute to the Canada Pension Plan, which provides retirement, disability and survivor benefits. Employees can access these benefits starting at the age of 65, and the amount of benefits paid out are dependent on contributions and the number of years of contributions, among other factors. 

Applicability: CPP contributions are mandatory for all employees across Canada, except those working in Quebec. Quebec administers their own plan.

Exempt From Paying: Employees under the 18 of age and over the age 69 are exempt from CPP contributions. 

Contribution Rate: Employers and employers are required to each contribute a percentage of the employee’s gross income, up to a yearly maximum. For 2024, the contribution rate is set at 5.95% for each party, with a yearly maximum of $3,867.50 contributed by each side. 

If you are self-employed, you are required to contribute both the employer and employee contributions on your personal tax return at year-end when you file.  This is a costly surprise for many self-employed individuals who make the mistake of not factoring this tax into their analysis of what self-employment looks like. 

Quebec Pension Plan (QPP) Contributions:

Purpose: The QPP operates similar to the Canada Pension Plan, but specific to Quebec residents. 

Applicability: All employees in Quebec.

Contribution Rate: Both employers and employees are required to contribute 6.4% each in 2024. The maximum contribution amount for each party is $4,160. 

Employment Insurance (EI) Premiums:

Purpose: Provides temporary income support to unemployed qualified workers along with maternity, parental, sickness, and caregiving benefits. 

Exempt From Paying: Exemptions from EI premiums can be available to certain employees in certain circumstances; one such circumstance is an employee who is also a significant shareholder of a corporate employer.  It is important to remember that in such circumstances, the employee is NOT eligible to claim EI benefits related to this employment. 

Contribution Rate: Employees contribute a percentage of their insurable earnings (1.66% in 2024) up to a maximum annual amount of $1,049.12. Employers are required to contribute at a rate of 2.32% to a maximum annual amount of $1,468.77. 

Quebec rates are different because Quebec offers its own parental and maternity benefits. Employees have to contribute a rate of 1.32% and employers need to contribute a rate of $1.85%.

Quebec Parental Insurance Plan (QPIP) Premiums:

Purpose: Provides Parental and Maternity Benefits to Quebec Residents. 

Applicability: Quebec (rather than the Federal EI parental and maternity benefits).

Contribution Rate: Employees contribute a rate of 0.494%, to an annual maximum of $464.36. Employers contribute at a rate of  0.692%, to an annual maximum of $650,48. 

Income Tax Withholding

Purpose: Employers must withhold federal and provincial taxes from employees’ wages based on tax tables. Then, they are required to remit the tax withheld to the tax authority, together with EI and CPP premiums, using a payment cycle which varies and depends on the level of gross payroll (among other factors).  Generally, the tax authority informs you what your remittance frequency is at the beginning of a calendar year; if facts change, so can your remittance frequency!

Rates: The rate varies depending on a few factors, including the particular mployee’s income, province/territory, and personal exemptions. 

Here is a quick reference chart for these rates: 

Payroll Tax	Applicable Region	Purpose	Contribution Rate	Employer Responsibility
Canadian Pension Plan (CPP)	All employees working in Canada except Quebec	Funds retirement, disability and survivor benefits.	5.95% for employer and employee up to annual max.	Withhold and match employee contributions, then remit to the government.
Quebec Pension Plan (QPP)	Employees working in Quebec	Funds retirement, disability and survivor benefits.	6.4% for employer and employee up to annual max, but may vary based on amount of income.	Withhold and match employee contributions, then remit to the government.
Employment Insurance (EI)	All employees working in Canada	Provides temporary income support and other benefits.	1.66% for employees and 2.32% for  employers not in Quebec.	Withhold and contribute 1.4 times the employee rate and remit to the government.
1.32% for employees and 1.85% for employers in Quebec.
Quebec Parental Insurance Plan (QPIP)	Quebec	Provides temporary income support and other benefits.	0.494% for employees and 0.692% for employers.	Withhold and match employee contributions and remit to the government.
Income Tax Withholding	All employees working in Canada	Federal and Provincial Taxes.	Varies by amount of income and region.	Withhold and remit to federal and provincial governments.

Other Contributions to Consider

In addition to the various contributions and taxes previously mentioned, businesses may need to account for additional obligations depending on their industry and region. 

Workers Compensation: Businesses employing workers may be required to register with the local workers compensation board, providing protection for employees who experience injury or illness while performing their duties. Rates vary based on provinces and industry. For instance, WorkSafeBC rates may range from $0.15 to $7 based per $100 of payroll. Ontario WSIB rates vary widely depending on the industry type.

Vacation Pay: Employers must comply with the minimum vacation pay requirements that are set provincially and federally. Vacation pay and time can change depending on the number of years worked and other factors, but the minimum amount is typically 4% of annual earnings, equivalent to 2 weeks of vacation. So, if an employee earns $50,000 annually, an employer must provide $2,000 in vacation pay or paid time off equivalent. 

Employer Health Tax: Businesses in Ontario and Manitoba may be required to pay yet another tax based on their total payroll. 

Don’t forget to file annual T4 slips reporting an employee’s gross income, taxes withheld, and other information to the CRA before the end of February!

Contractor payments have their own filing obligations as well - we cover that in another article in our Community.

Have any additional questions about payroll taxes in Canada? 

Book a free consult here.