4. PAYROLL COMPLIANCE AND REGULATIONS¶

Learning Objectives

By the end of this chapter, you will have a foundational understanding of payroll compliance and regulations in Canada. This includes the various stakeholders involved, the objectives of payroll, and the legal frameworks that govern payroll processes. You will also learn how to differentiate between federal and provincial/territorial jurisdictions, and how they affect payroll administration. Additionally, you will understand the Canada Revenue Agency’s criteria for determining whether an individual is classified as an employee or self-employed.

This chapter will cover the following topics:

  1. Identify four uses of the term payroll

  2. Describe payroll’s objectives

  3. Describe who payroll’s stakeholders are

  4. Differentiate between federal and provincial/territorial jurisdictions

  5. Explain how each stakeholder affects payroll processes and procedures

  6. Apply the Canada Revenue Agency’s factors for determining whether an individual is an employee or self-employed

4.1. Introduction¶

Payroll is a necessary function in every organization that has employees, as each employee expects to be paid for the work they perform. While the amount of maximum remuneration that an employee receives for their work is not legislated by any government (unless the employee is a federal or provincial/territorial civil servant), there is legislation in place at both the federal and provincial/territorial levels that governs many aspects of processing employees’ pay, their taxable benefits and observing their rights as employees.

It is important to note that for the scope of this course, the payroll includes the function of paying employees for work performed for employers. Self-employed workers or contractors, who submit invoices for the work they perform and receive payment through accounts payable and not payroll, are not employees. This chapter illustrates how to determine if an employeeemployer relationship exists. Once an employee-employer relationship has been established, the correct method of payment for services can be determined.

Both the federal and the Québec governments provide factors that can be used to determine whether an employee-employer relationship exists. It is crucial to know how to determine the type of relationship that exists between the worker and the organization and to ensure that any payments made comply with legislation.

4.2. Payroll Objectives¶

The primary objective of the payroll function in every organization is to pay employees accurately and on time, in compliance with legislative requirements, for a full annual payroll cycle.

Every employee expects to receive their pay on the day it is due in the manner arranged with their employer, either by cheque or direct deposit. In addition to ensuring that employees have been paid, payroll practitioners must also be able to communicate payroll information to all stakeholders.

Payroll is the process of paying employees in exchange for the services they perform. The term payroll can refer to:

  • the department that administers the payroll

  • the total number of people employed by an organization

  • the wages and salaries paid out in a year

  • a list of employees to be paid and the amount due to each

Legislation refers to laws enacted by a legislative body. In Canada there are many legislative sources that payroll practitioners must comply with at two separate levels ─ the federal and the provincial/territorial governments. Later in the chapter we will explore the compliance requirements for the various pieces of legislation from these sources.

Compliance is the observance of official requirements. For payroll practitioners, this means performing payroll functions according to federal and provincial/territorial legislative and non-governmental stakeholder requirements.

The legislative requirements are termed statutory. This means they are enacted, created, or regulated by statute, a law enacted by the legislative branch of a government. Fines and penalties can be imposed if an organization is not in compliance with the legislative requirements in each jurisdiction.

When dealing with federal and provincial/territorial government agencies, payroll practitioners must know the many pieces of legislation that regulate their work and the compliance requirements associated with each. Payroll practitioners are responsible for ensuring their organization is compliant with all payroll related legislation, thus eliminating the potential for any fines or penalties.

In payroll, there are also compliance requirements from other non-government stakeholders, for example, union collective agreements or group insurance policies. Payroll practitioners must therefore ensure the organization is compliant with all stakeholder requirements.

4.3. Responsibilities and Functions of Payroll¶

The responsibilities of the payroll practitioner will differ depending on the size of the organization, the number of jurisdictions in which they pay, the reporting structure under which they work, and whether there are other related departments, such as human resources, finance and administration in the organization.

Small and medium-sized organizations may have payroll practitioners whose positions include other functions that, in a larger organization, would fall under other departments. This payroll practitioner may be required to handle multiple tasks, such as employee recruitment, human resource policy development, benefits administration, accounts payable, accounts receivable, budgets and/or administration. These practitioners must have excellent knowledge of all areas for which they are responsible and be aware of the resources available to provide advice and information.

Larger organizations may have a distinct payroll department with specific payroll positions, in addition to separate human resources, accounting and administration groups. Even in a multi-departmental organization, payroll practitioners must have knowledge of the various stages of the life cycle of an employee. From hiring through termination of employment, many of these stages will impact how to produce the employee’s pay and prepare required reports.

The payroll department in a large organization may have:

  • payroll administrators who are responsible for entering payroll data into the system and making required payroll remittances

  • payroll coordinators who are responsible for preparing the payroll journal entries and reconciling the payroll related accounts

  • payroll managers who manage the payroll function, the payroll staff and represent payroll at the management level

Content Knowledge

Payroll practitioners should know the following to effectively perform their duties:

  • Payroll Compliance Legislation: the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act, Employment/Labour Standards, privacy legislation, Workers’ Compensation and provincial/territorial payroll-specific legislation

  • Payroll Processes: the remuneration and deduction components of payroll and how to use these components to calculate a net pay in both regular and non-regular circumstances

  • Payroll Reporting: how to calculate and remit amounts due to government agencies, insurance companies, unions and other third parties. In addition, payroll reporting includes accounting for payroll expenses and accruals to internal financial systems and federal and provincial/territorial year-end reporting.

Technical Skills

The technical skills required by payroll professionals include proficiency in computer programs such as payroll software and financial systems, spreadsheets, databases and word processing.

Organizations often change their payroll and business systems to meet new technology requirements and corporate reporting needs. It is important for payroll personnel to have the ability to be adaptable to changing systems. As a payroll practitioner, you must be prepared and willing to embrace continuous learning.

Personal and Professional Skills

The following personal and professional skills will assist payroll practitioners in dealing with the various stakeholders involved in the payroll process:

  • written communication skills, such as preparing employee emails and memos, management reports, policies and procedures and correspondence with various levels of government

  • verbal communication skills, to be able to respond to internal and external stakeholder inquiries

  • the ability to read, understand and interpret legal terminology found in documents such as collective agreements, benefit contracts and government regulations

  • excellent mathematical skills to perform various calculations

  • problem solving, decision-making, time management and organizational skills

Behavioural and Ethical Standards

Behaviour and ethics are two areas that build on the skills that an effective payroll practitioner must have. Effective payroll professionals should be:

  • trustworthy, as the potential for fraud is ever present

  • conscientious, with a keen attention to detail

  • discreet, due to the confidential nature of information being handled

  • tactful in dealing with employees who can be very sensitive when discussing their financial issues

  • perceptive, able to understand all sides of an issue

  • able to work under the pressures of absolute deadlines

  • able to use common sense in order to recognize problems quickly and apply sound solutions

  • able to remain objective and maintain a factual perspective when dealing with questions and inquiries

4.4. Payroll Stakeholders¶

Stakeholders are the individuals, groups and agencies, both internal and external to the organization, who share an interest in the function and output of the payroll department. Stakeholders can be considered customers of the payroll department and payroll practitioners can take a proactive customer service approach to serving these individuals and groups.

Payroll management stakeholders are the federal and provincial/territorial governments, the internal stakeholders and the external stakeholders. Internal stakeholders include employees, employers and other departments within the organization. External stakeholders include benefit carriers, courts, unions, pension providers, charities, third party administrators and outsource/software vendors.

4.4.1. Government Stakeholders¶

Government legislation provides the rules and regulations that the payroll function must administer with respect to payments made to employees. For this reason, it is important for the payroll practitioner to understand both the scope and the source of payroll-related legislation.

Canada is ruled by a federal government with ten largely self-governing provinces and three territories controlled by the federal government. Payroll practitioners have to be compliant not only with the federal government legislation, but with the provincial and territorial governments’ legislation as well.

As a result, payroll practitioners and their organizations are affected by the enactment of legislation at both the federal and provincial/territorial level.

The federal parliament has the power to make laws for the peace, order and good government of Canada. The federal cabinet is responsible for most of the legislation introduced by parliament, and has the sole power to prepare and introduce tax legislation involving the expenditure of public money.

The provincial/territorial legislatures have power over direct taxation in the province or territory for the purposes of natural resources, prisons (except for federal penitentiaries), charitable institutions, hospitals (except marine hospitals), municipal institutions, education, licences for provincial/territorial and municipal revenue purposes, local works, incorporation of provincial/territorial organizations, the creation of courts and the administration of justice, fines and penalties for breaking provincial/territorial laws.

Both the federal and provincial/territorial governments have power over agriculture, immigration and certain aspects of natural resources. Should their laws conflict, federal law prevails.

In the case of old age, disability, and survivor’s pensions, again both the federal and provincial/territorial governments have power. In this instance, if their laws conflict, the provincial/territorial power prevails.

The federal government cannot transfer any of its powers to a provincial/territorial legislature, nor can a provincial/territorial legislature transfer any of its powers to the federal government. The federal government can, however, delegate the administration of a federal act to a provincial/territorial agency, and a provincial/territorial legislature can delegate the administration of a provincial/territorial act to a federal agency.

As all provinces and territories (except Québec) have delegated the administration of the collection of income tax deductions to the federal government, the Canada Revenue Agency (CRA) collects income tax withheld from employees under both federal and provincial/territorial requirements. Québec collects its provincial income tax directly.

4.4.2. Federal Government¶

The Constitution Act of 1867 outlined the division of legislative power and authority between federal and provincial/territorial jurisdictional governments. The exclusive legislative authority of the Parliament of Canada extends to all matters regarding:

  • regulation of trade and commerce

  • Employment Insurance

  • postal service

  • fixing and providing salaries and allowances for civil and other officers of the Government of Canada

  • navigation and shipping

  • ferries between a province and any British or foreign country or between two provinces

  • criminal law, except the Constitution of Courts of Criminal Jurisdiction, but including the Procedure in Criminal Matters

  • anything not specifically assigned to the provinces under this Act

The Canada Labour Code is legislation that consolidates certain statutes respecting labour. Part I deals with Industrial Relations, Part II deals with Occupational Health and Safety and Part III deals with Labour Standards. The primary objective of Part III is to establish and protect employees’ and employers’ rights to fair and equitable conditions of employment. Part III provisions establish minimum requirements concerning the working conditions of employees under federal jurisdiction in the following industries and organizations:

  • industries and undertakings of inter-provincial/territorial, national, or international nature, that is, transportation, communications, radio and television broadcasting, banking, uranium mining, grain elevators, and flour and feed operations

  • organizations whose operations have been declared for the general advantage of Canada or two or more provinces, and such Crown corporations as Canada Post Corporation, and the Canadian Broadcasting Corporation (CBC)

4.4.3. Provincial/Territorial Governments¶

Under the Constitution Act of 1867, the exclusive legislative authority of the provinces and territories exists over:

  • all laws regarding property and civil rights, which give the provinces/territories the authority to enact legislation to establish employment standards for working conditions

  • employment in manufacturing, mining, construction, wholesale and retail trade, service industries, local businesses and any industry or occupation not specifically covered under federal jurisdiction

The existing divisions between federal and provincial/territorial control impact payroll when dealing with employment/labour standards. Employment/labour standards are rules legislated by each provincial/territorial jurisdiction that dictate issues such as hours of work, minimum wage, overtime, vacation pay and termination pay requirements.

Example:

The Gap is a retail business with stores across Canada. The workers in each store are governed under the employment/labour standards legislated in the jurisdiction in which they work. For example, the minimum general hourly wage in effect January 1, 2020 (which is governed by provincial/territorial employment/labour standards) is higher in Ontario than in Prince Edward Island. An employee working in Ontario would receive a higher hourly minimum wage than an employee with the same position in Prince Edward Island.

Employers must follow the employment/labour standards legislated by the jurisdiction in which their employees work, unless they are governed by federal labour standards. Federal labour standards apply to certain industries and organizations, regardless of where the employees work.

The person or persons performing the payroll function must clearly understand under which employment/labour standards jurisdiction the employees of the organization fall. Organizations may have some employees who fall under federal jurisdiction and another group of employees who fall under provincial/territorial legislation.

4.4.4. Internal Stakeholders¶

Internal stakeholders are those individuals or departments closely related to the organization that the payroll department is serving. This group includes employers, employees and other departments in the organization.

Employers - Management may require certain information from payroll to make sound business decisions.

Employees - Employees require that their pay is received in a timely and accurate manner to meet personal obligations. Employees must also be assured that their personal information is kept confidential.

Other departments - Many departments interact with payroll, either for information or reporting. According to the Canadian Payroll Association’s 2020 National Payroll Week (NPW) Payroll Professional Research Survey, fifty-five percent of payroll practitioners report through the finance department and thirty-two percent report through the human resources department. Information such as general ledger posting, payroll and benefit costs and salary information must flow between payroll, human resources and finance in formats needed for their various requirements.

In addition, other departments such as contracts and manufacturing often need payroll information for budgeting, analytical and quality purposes.

4.4.5. External Stakeholders¶

External stakeholders are organizations that are neither government nor internal stakeholders, yet have a close working relationship with the payroll function. Compliance with external stakeholder requirements is also a responsibility of the payroll department. In most cases, compliance will require that payroll request a cheque from accounts payable and send it to the external organization along with supporting documentation.

Benefit Carriers are insurance companies that provide benefit coverage to employees. Payroll is responsible for deducting and remitting premiums for the insurance coverage to the carriers and for providing reports on employee enrolment and coverage levels.

Courts and the CRA require payroll to accurately deduct and remit amounts ordered to be withheld through garnishments, third party demands, requirements to pay and support deduction orders.

Unions require that payroll accurately deduct and remit union dues and initiation fees, and to ensure that the terms of the collective agreement are adhered to. It is estimated that just under one-third of the workforce in Canada belongs to a trade union. Payroll professionals must be familiar with the role and activities of trade unions and the responsibilities of the employer and the payroll department in a unionized environment.

Pension Providers are third party pension plan providers that may require payroll to provide enrolment reports on participating employees and length of service calculations, and to remit employee deductions and employer contributions

Charities have arrangements with some organizations to facilitate employee donations through payroll deductions. Payroll is responsible for remitting these deductions to the charity.

Third Party Administrators are organizations that affect the administration of the payroll function. Examples of these external stakeholders are banking institutions or benefit organizations that offer Group Registered Retirement Saving Plans (RRSP). Payroll is responsible for deducting any employee contributions and remitting employer and employee contributions to the plan administrator.

Outsource/Software vendors are payroll service providers or payroll software vendors that work with the payroll department to ensure the payroll is being processed accurately and efficiently.

4.5. Legislation¶

4.6. The Employee-Employer Relationship¶

4.7. Review Summary¶

The primary objective of the payroll function in every organization is to ensure that employees are paid accurately and on time, in full compliance with legislative requirements, throughout the entire annual payroll cycle. This function is critical to maintaining employee satisfaction, legal integrity, and operational efficiency.

Payroll itself is the process of compensating employees for the services they perform. It encompasses calculating wages, deducting taxes and benefits, and distributing payments. Ensuring accuracy in this process is essential to avoid financial discrepancies and maintain trust within the organization.

Legislation refers to the laws enacted by a legislative body that govern payroll practices. These laws may include tax regulations, labor standards, and employment rights, all of which must be adhered to by the payroll department. Compliance, in this context, means observing and fulfilling these official requirements to avoid legal penalties and ensure ethical operations.

A payroll practitioner’s knowledge base includes a thorough understanding of payroll compliance legislation, payroll processes, and payroll reporting. In addition to technical expertise, practitioners must also possess strong personal and professional skills to manage responsibilities effectively and adapt to evolving regulatory environments.

Stakeholders are the individuals, groups, and agencies—both internal and external to the organization—who have a vested interest in the function and output of the payroll department. Their involvement and expectations influence how payroll is managed, ensuring that it aligns with organizational goals and legal obligations.

Payroll management stakeholders include federal and provincial/territorial governments, internal stakeholders, and external stakeholders. Internal stakeholders consist of employees, employers, and other departments within the organization, all of whom rely on accurate and timely payroll services. External stakeholders encompass benefit carriers, courts, unions, pension providers, charities, third-party administrators, and outsource or software vendors. These entities interact with payroll data and processes, often requiring coordination and compliance.

The federal parliament holds the authority to enact laws for the peace, order, and good government of Canada. It exercises control over industries and undertakings that are inter-provincial, national, or international in nature, as well as rganizations deemed to serve the general advantage of Canada or multiple provinces, including Crown corporations. In contrast, provincial and territorial legislatures have jurisdiction over direct taxation for regional purposes and laws concerning property, civil rights, and employment in sectors such as manufacturing, mining, construction, wholesale and retail trade, service industries, and local businesses. Any industry or occupation not specifically under federal jurisdiction falls within provincial or territorial control.

Employers are required to adhere to the employment and labour standards legislated by the jurisdiction in which their employees work, unless they are governed by federal labour standards. Where legislation mandates employer compliance, financial penalties or legal action may be imposed to enforce adherence and promote accountability.

4.8. Review Questions¶

What is the primary objective of the payroll department?

List four definitions of payroll.

List the three types of payroll management stakeholders and provide an example of each.

Explain the difference between legislation and regulation.

What are two examples of sources of information that you use (or could use) to keep upto-date on payroll compliance changes?

List three external stakeholders and explain their compliance requirements.

Indicate the jurisdiction the following employees fall under:

  • Canada Post Corporation

  • An insurance company

  • A uranium mining company

  • Canadian Broadcasting Corporation

  • A retail department store with locations in every province

  • A chartered bank.