Canadian Payroll: More Complex Than Most Business Owners Expect
Hiring your first employee is a major milestone. It's also the moment your compliance obligations jump significantly. Canadian payroll involves statutory deductions, government remittances, year-end reporting, and deadlines that, if missed, attract real penalties from the CRA.
This guide covers every step of Canadian payroll compliance for small businesses — from setting up your payroll account to issuing year-end T4s.
Step 1: Register for a Payroll Account with the CRA
Before your first payroll run, you need a Business Number (BN) with a payroll program account (RP). If you already have a BN for GST/HST purposes, you simply add an RP account.
Register through:
- CRA My Business Account (online, fastest)
- Business Registration Online (BRO)
- Phone: 1-800-959-5525
Processing takes 1–5 business days. You cannot legally run payroll without this account.
Step 2: Understand the Three Mandatory Deductions
Every employee paycheque involves three statutory deductions that must be withheld and remitted to CRA:
Canada Pension Plan (CPP)
- Employee rate (2024): 5.95% of pensionable earnings
- Employer rate: Equal to the employee contribution (you match dollar for dollar)
- Annual maximum (2024): $3,867.50 employee contribution; you pay the same as employer
CPP deductions begin on the first dollar of pensionable earnings above the basic exemption ($3,500 annual).
Employment Insurance (EI)
- Employee premium rate (2024): 1.66% of insurable earnings
- Employer rate: 1.4× the employee rate = 2.324%
- Annual maximum insurable earnings (2024): $63,200
EI premiums apply from the first dollar of insurable earnings. Unlike CPP, there's no basic exemption.
Federal and Provincial Income Tax
Income tax withholding is calculated based on:
- The employee's TD1 federal and provincial personal tax credits form
- The pay period (weekly, bi-weekly, semi-monthly, monthly)
- Any additional amounts the employee requests withheld
Use the CRA Payroll Deductions Online Calculator (PDOC) or your payroll software to calculate the correct withholding for each pay period.
Step 3: Calculate Gross Pay and Net Pay
Gross pay = Salary or hours × hourly rate, plus overtime, vacation pay, commissions, bonuses, and taxable benefits.
Net pay = Gross pay − CPP (employee) − EI (employee) − Income tax
Your remittance to CRA = CPP (employee + employer) + EI (employee + employer) + Income tax
Step 4: Remit to the CRA on Time
This is where most small businesses run into trouble. CRA remittance deadlines depend on your average monthly withholding amount in the previous year:
| Average Monthly Withholding | Frequency | Deadline | |---|---|---| | Under $3,000 | Monthly | 15th of following month | | $3,000–$49,999 | Twice-monthly (Accelerated 1) | After 1st–15th: 25th; After 16th–end: 10th of next month | | $50,000+ | Weekly (Accelerated 2) | 3rd working day after each week |
New employers default to monthly remittance. Most small businesses stay on monthly.
Late or missed remittances attract penalties of 3–10% on the outstanding amount, plus compound daily interest. These penalties are personal liability for business directors — they survive bankruptcy and can be collected from you personally.
Step 5: Maintain Proper Payroll Records
CRA requires you to keep payroll records for a minimum of 6 years. Records must include:
- Employee name, address, and SIN
- Date of hire and termination
- Gross pay per pay period
- All deductions (CPP, EI, income tax, other)
- Net pay and payment method
- Vacation pay accrual and payments
- All TD1 forms
Step 6: Issue T4 Slips by February 28
Every employee who received employment income from you in a calendar year must receive a T4 Statement of Remuneration Paid by the last day of February of the following year. The T4 summary must be filed with CRA simultaneously.
The T4 reports:
- Total employment income
- CPP contributions (Box 16)
- EI premiums (Box 18)
- Income tax deducted (Box 22)
- Any taxable benefits
Late T4 filing incurs penalties of $25/day (minimum $100, maximum $2,500 per type of information return).
Step 7: Issue a Record of Employment (ROE) When Employment Ends
When an employee's employment ends (resignation, termination, parental leave, illness), you must issue a Record of Employment (ROE) within 5 calendar days of the last day worked (or the last day of the pay period in which interruption of earnings occurs).
ROEs must be filed electronically through the Service Canada ROE Web system if you pay more than 2 employees.
Late ROE issuance can affect the employee's EI eligibility — and it reflects poorly on your business as an employer.
Payroll for Contractors vs. Employees: The Critical Distinction
Many business owners misclassify employees as independent contractors to avoid payroll obligations. CRA actively audits for this.
CRA uses several tests to determine employee vs. contractor:
- Control: Who directs how and when the work is done?
- Tools: Who provides equipment and resources?
- Chance of profit/risk of loss: Does the worker risk financial loss?
- Integration: Is the worker integrated into the business?
Misclassifying an employee as a contractor means back-owing all CPP (both shares), EI (both shares), and income tax deductions — plus interest and penalties going back years. The personal director liability applies here too.
Payroll Software Recommendations for Canadian Small Businesses
| Software | Best For | Starting Cost | |---|---|---| | Payworks | Canadian-only businesses, strong CRA integration | ~$50/mo | | ADP Run | Businesses with US and Canadian employees | Custom | | Gusto | Modern interface, popular with startups | $40 USD base + per employee | | Wagepoint | Small Canadian businesses | $25 CAD base + per employee |
All of these integrate with QuickBooks Online and Xero for seamless bookkeeping reconciliation.
How North Ledger Manages Your Payroll
We run payroll for Canadian and US clients through your preferred payroll platform. Our service includes:
- Payroll calculation for each pay period
- CRA remittance coordination and tracking
- T4 and T4A preparation at year-end
- ROE filing when employment ends
- Monthly reconciliation of payroll accounts to your general ledger
Book a call to discuss adding payroll to your North Ledger engagement.
Further Reading
- Year-End Bookkeeping Checklist for Canadian Small Businesses: T4 preparation and payroll reconciliation are core year-end tasks — see the complete checklist.
- When Should a Startup Hire a Bookkeeper?: Payroll complexity is often the trigger for outsourcing financial admin — see all six signals.
- Complete Guide to GST/HST for Canadian Small Businesses: If you have employees, you're almost certainly also managing GST/HST obligations — here's the full picture.
