Businesses that operate in Canada must adhere to certain rules and regulations established by the Canada Revenue Agency or CRA. These include the recording and posting of payroll deductions and payroll remittances.
We will briefly outline what these deductions are as well as the proper remittance schedule that businesses in Canada need to follow.
First, let’s begin with a discussion of payroll deductions.
In short, this is an amount that is taken out of an employee’s paycheck by the employer in order to fund government services. There are typically two categories for these deductions, voluntary and mandatory.
Mandatory deductions are those programs that apply to all Canadian wage earners. Employees are required to take these deductions out of an employee’s paycheck each and every pay period. These mandatory deductions include the employee’s tax obligations, contributions to pension plans, and insurance.
The second category of deduction, known as voluntary deductions, consists of savings bonds, social funds, charitable contributions, and so on.
It is incumbent upon the employer to make sure that all mandatory or voluntary deductions are noted on an employee’s payslip including specific names and amounts.
Once all of this is determined on an employee-by-employee basis, the employer can begin the formal process of making payroll deductions.
Common Mandatory Deductions in Canada
Let’s address the mandatory deductions.
Examples of these deductions include the Canada Pension Plan, Employment Insurance, and income taxes.
The first, the Canadian Pension Plan, applies to all employees between 18 and 70 years of age who are not already receiving payments from the CPP or are classified as being disabled.
There is a separate plan in Quebec called the QPP that functions in a similar fashion to the Canadian system. Employers should apply contribution rates and maximums to each employee to determine their annual CPP obligations.
Employment Insurance is another deduction that applies to all employees as it provides for them in the event of unemployment due to a range of circumstances that may arise. This is an amount paid by both employees and employers equally.
Again, as with the pension system, there is a separate Quebec Parental Insurance Plan (QPIP).
Last, income taxes are perhaps the most well-known deduction.
These are mandatory at both the federal and provincial/territorial levels. Employers must deduct these amounts from the employee’s paycheck each and every pay period. To calculate this, employers use what is called the Personal Tax Credits Return or a Form TD1.
This is filled out by the employee and this information is then used to make the proper deductions. Again, in Quebec, there is a different form, the TP-1015.3-V, Source Deductions Return.
How do these relate to payroll remittance? In the simplest terms possible, remittance is the process of filing these deductions with Canadian tax authorities.
The Process of Payroll Remittance
That is why these two processes, payroll deductions, and payroll remittances, go hand-in-hand. These remittances can be filed via mail or online.
It is very important that companies operating in Canada post these remittances in a timely fashion. Failure to do so can result in hefty penalties for the firm in question including fines.
We must emphasize the importance of paying on time: Even a few days late can incur significant penalties for the company in question.
The penalties are:
- 1-3 days late: 3%
- 4-5 days late: 5%
- 6-7 days late: 7%
- 7+ days late: 10% (if no amount paid at all)
- 20% for recurring penalties in one calendar year
Nonpayment, in particular, is a very serious matter. Businesses that fail to pay their obligations can have their property seized, wages garnished, and ownership can even face jail time.
The exact remittance schedule that businesses need to follow is outlined by the Canadian government and specifies when certain events need to occur and within what time frame.
Determining Remitter Type
A business’s payroll filing is determined by what is called remitter type. To determine this, a firm needs to examine its average monthly withholding amount (AMWA) from two years prior.
The annual amount averaged out over a 12-month period will classify the firm as one of four remitter types: new, regular, accelerated, or quarterly.
This remitter type is very important as it will determine what forms the business in question needs to fill out.
Remitter types classified as regular, quarterly, and monthly will use Form PD7A, Remittance Voucher – Statement of Account for Current Source Deduction while accelerated remitters should use either Form PD7A(TM), Remittance Voucher – Statement of Account for Current Source Deduction, or Form PD7A-RB, Remittance Voucher.
Naturally, this entire process can be streamlined through a third-party payroll service that handles the logistics of all of this for the company.