Private: Copy of Module 3: Taxation and Employee Deductions

Previous Lesson
Next Lesson

3.3 – Federal Payroll Deductions

Payroll Steps

If you have employees, you must set up a payroll account. These are the steps to follow to set up your payroll and to understand how federal payroll deductions work:

  • Determine whether you are an employer.
  • If so, open a payroll account.
  • Hire your employees.
  • Calculate the CPP contributions, EI premiums, and income tax deductions based on the amounts paid to your employees. You will also calculate your share of the CPP and EI – this is covered later in this Module.
  • Remit the deductions along with your share of the CPP and EI.
  • Report the income and deductions on the appropriate information return.
  • Keep proper records.

There are commercial payroll businesses that will calculate the proper deductions and contributions as part of their services. CRA has an on-line payroll deduction calculator.

 

Nature of the Employment Relationship

It is essential that you determine whether you are an employer because if you are not, then payroll deductions will not apply to you. An employer/employee relationship usually exists if you have the right to control and direct the person who performs services for you. It is your right to exercise control that is relevant, not whether you actually exercise your right. In general, those who pay wages or salaries to others for the performance of services are considered employers by CRA.

The first step is to determine whether the relationship you have with those who work for you is a contract of employment as opposed to an independent service contract. Determination of an employment relationship is essentially a question of fact. The Supreme Court of Canada in 671122 Ontario v. Sagaz, 2001 SCC 59 stated at 47:

The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account. In making this determination, the level of control the employer has over the worker’s activities will always be a factor. However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker’s opportunity for profit in the performance of his or her tasks.

No single factor is determinative, nor is the fact that you choose to structure an arrangement as an independent services contract rather than an employment contract. If you have any doubts about whether an employer/employee relationship exists, you can request a ruling from CRA.

 

Want more information?
To learn more about determining whether an employment relationship exists, see eText on Wrongful Dismissal and Employment Law, 2012 CanLIIDocs 1.

For more information on requesting a ruling from the CRA, including the form and instructions, see “Employee or Self-employed?” on the CRA website.

 

Opening a Payroll Account

If you already have a BN, you only need to add a payroll account to your existing BN. If you do not have a BN, you will need to register for a BN and a payroll account. You can register by phone, mail, in person, or through the integrated Business Registration On-line service. This convenient service lets you:

  • register a business for a BN;
  • register for all the CRA programs including payroll deductions, GST, and (if you are practising through a law corporation) corporate income tax accounts.

You should register for your payroll account before the first remittance due date. In most cases the first remittance due date will be the 15th day of the month following the month in which you began withholding deductions from an employee’s pay. For example:

  • You hire your first employee on March 16 and pay on the 15th and the 30th of every month.
  • The first pay is on March 30; therefore, your first remittance is due April 15.
  • You should open your payroll account prior to April 15.

If you don’t open your account before the due date, you are still responsible to calculate the deductions and remit. There is a penalty for failure to deduct and remit amounts on time.