2. PAYROLL COMPLIANCE¶

2.1. The Canada Revenue Agency¶

Under the Canada Pension Plan Act and the Employment Insurance Act, the CRA is responsible for determining:

  • whether or not an individual’s employment is pensionable under the Canada Pension

Plan Act or insurable under the Employment Insurance Act

  • the types of earnings that are considered pensionable or insurable

  • how many hours an insured person has in insurable employment

  • the recovery of any debts owed as a result of an overpayment of Canada Pension

Plan, Employment Insurance, or Old Age Security benefits

The CRA is also responsible for ensuring that CPP contributions and EI premiums are deducted, remitted and reported as required by legislation.

The Canada Revenue Agency (CRA) is a federal government agency that manages the following business lines for the federal government: Tax Services and Benefit Programs. The Tax Services business line assists over 25 million individuals, businesses, trusts, and organizations to meet their obligations under the tax system. Each year, the CRA collects approximately $324 billion in gross taxes and excise duties on behalf of the federal and provincial governments - the equivalent of about $1.2 billion every working day. The CRA’s mission is to promote compliance with Canada’s tax legislation and regulations through communication, quality service, and responsible enforcement, thereby contributing to the economic and social well-being of Canadians.

From this mission comes the CRA’s mandate to:

  • collect revenues and administer tax laws for the federal government and for most provinces and territories

  • deliver various social and economic benefit incentive programs to Canadians

The CRA tracks the success of the first part of its mandate by measuring compliance in the following areas:

  • Filing: the CRA’s goal is to have over 90% of individual and corporate income tax and registered business’ goods and services tax/harmonized sales tax (GST/HST) returns filed on time.

  • Registration: the CRA measures its success in this area by ensuring that the majority of all known businesses are registered for various programs including corporate income tax, GST/HST, payroll deductions, and import/export accounts.

  • Remittance: the CRA’s goal is to have over 90% of individual and corporate tax filers pay their taxes on time.

  • Reporting: the CRA measures reporting compliance through the information it receives on tax documents, for example, the T4 and T4A information slips.

The CRA’s program responsibilities that are specifically related to payroll include the administration of:

  • the Canada Pension Plan (CPP) (shared responsibility with Employment and Social Development Canada and Service Canada)

  • Employment Insurance (EI) (shared responsibility with Employment and Social Development Canada and Service Canada)

  • Income Tax

Each of these programs requires compliance by employers to withhold deductions from their employees’ pay for CPP contributions, EI premiums and income tax deductions. These withholdings are termed statutory deductions as the deductions are required under legislative statute. Statutory deductions are the first deductions to be withheld from an employee’s gross pay.

2.1.1. Canada Pension Plan (CPP)¶

The Canada Pension Plan became operational on January 1, 1966. The plan was fully effective in 1976 after a ten year transitional period. The Canada Pension Plan is a social insurance program, legislated under the federal Canada Pension Plan Act, designed to provide protection in the form of benefits to contributors and their families against loss of income due to retirement.

In addition to retirement pension benefits, the plan provides supplementary benefits in the form of:

  • surviving spouse pensions

  • disability benefits

  • benefits for orphans and children of disabled contributors

  • death benefits payable upon the death of a contributor

All employers are required by law to deduct CPP contributions from pensionable earnings paid to their employees, and to remit these deductions, along with the employer’s portion, to the CRA. The employer matches the employee’s contributions dollar for dollar.

EXAMPLE

Janet Frank has $45.00 in CPP contributions deducted from her gross pay. Her employer, Northern Skies, must match her contribution of $45.00. A total of $90.00 in CPP contributions must be remitted to the CRA.

CPP contributions take priority over all other deductions and are therefore the first statutory deduction to be withheld from an employee’s gross pay.

2.1.2. Employment Insurance (EI)¶

The CRA’s responsibility for the Employment Insurance program is associated with the collection of employee and employer premiums. It also makes decisions about which types of remuneration are considered insurable and, therefore, subject to EI premiums. All employers are required by law to deduct EI premiums from the insurable earnings paid to their employees, and remit these deductions, along with the employer’s portion, to the CRA. The employer’s portion is 1.4 times the employee’s portion.

EXAMPLE

Janet Frank has $20.00 in EI premiums deducted from her gross pay. Her employer, Northern Skies must contribute $28.00 ($20.00 x 1.4). A total of $48.00 in EI premiums must be remitted to the CRA.

EI premiums are the second statutory deduction to be withheld from an employee’s pay. Employers are also required to track the employee’s insurable earnings and insurable hours by pay period for reporting purposes, such as completing the Record of Employment for a terminated or inactive employee.

2.1.3. Income Tax¶

Income taxation began in Canada, and in many other countries, during World War I. In July 1917, the Government of Canada passed legislation which enabled the government to levy a temporary tax on personal income. This tax was intended to help finance government expenditures for World War I; however, it eventually became the basic tax on all incomes.

When income tax was first introduced, each person was responsible for paying their own income tax directly to the federal government. In 1940, the federal government legislated deductions at source, which meant that employers became responsible for withholding income tax from remuneration paid to employees. Beginning January 1, 1962, all provinces imposed personal income tax; prior to that date, only Québec imposed such a tax.

Income tax withholdings are calculated by applying a federal tax rate and a separate provincial/territorial tax rate to the employee’s taxable income. The employee’s province of employment determines which provincial/territorial tax rate to apply. The federal government and all provinces and territories, except QuĂ©bec, have the same definition of taxable income.

All Canadian provinces/territories, except Québec, have entered into tax collection agreements with the federal government. Under these agreements the CRA collects the provincial/territorial income taxes on behalf of the provinces/territories. The CRA then distributes the provincial/territorial income taxes it has collected through a series of transfer payments to the provinces/territories. These transfer payments are based on the personal tax returns filed by Canadian taxpayers.

As the federal government collects both the federal and the provincial/territorial portions of tax from all employees working in a province/territory other than Québec, the two tax withholdings, federal and provincial/territorial, are combined into one deduction amount. The employee may only see one item Income Tax or Federal Income Tax listed on their pay statement, however it is the total of two withholdings.

QuĂ©bec collects its own provincial income tax. There are two separate income tax deductions withheld from QuĂ©bec employees — one for federal income tax and the other for QuĂ©bec provincial income tax. The federal income tax is remitted to the CRA and the QuĂ©bec provincial income tax is remitted to Revenu QuĂ©bec (RQ). QuĂ©bec employees will see Federal Income Tax and QuĂ©bec Income Tax listed separately on their pay statements. RQ is discussed extensively in a later chapter.

2.2. Non-Compliance Penalties¶

If an organization fails to deduct and remit the amounts withheld from employees for CPP contributions, EI premiums and income tax, it may be left in the position of having to pay both the employer’s and the employee’s portion of deductions not taken, as well as penalties and interest charges on the outstanding amount.

An employer who remits withholdings or deductions late is subject to the following penalties:

  • 3% will be applied to remittances that are 1 to 3 days late

  • 5% for remittances that are 4 or 5 days late

  • 7% for remittances that are 6 or 7 days late

  • 10% for remittances that are 8 or more days late

An employer who withholds the statutory deductions but does not remit them, or fails to deduct the required deductions, will be subject to a 10% penalty for the first occurrence on the amount that should have been deducted and remitted. This penalty may increase to 20% for the second and each subsequent occurrence in the same calendar year if the failure was made knowingly or under circumstances of gross negligence. Penalties will be applied to amounts in excess of $500; however, in the case of wilful delay or deficiency, these penalties can be levied on amounts of less than $500.

The Canada Revenue Agency (CRA) charges interest on any unpaid remittances and unpaid penalties from the day the payment was due. The interest rate is determined every three months, in accordance with the prescribed interest rates, and is available on the CRA website.

As a payroll practitioner, you need to have a clear understanding of how and when to make the required deductions and remittances to avoid these penalties and interest charges.

All monies deducted on behalf of the CRA are considered to be held “in trust” for the Receiver General. The amount owed must be kept separate from the operating funds of the organization. In the event of estate liquidation, assignment, receivership, or bankruptcy the trust money for statutory deductions is still owed to the CRA.

2.3. Employment and Social Development Canada (ESDC)¶

2.4. Service Canada¶

2.4.1. Social Insurance Number (SIN)¶

2.5. Statistics Canada¶

2.6. Personal Privacy¶

2.6.1. The Privacy Principles¶

2.6.2. The Personal Information Protection and Electronic Documents Act (PIPEDA)¶

2.7. Pension Benefits Standards Act¶

2.8. Canadian Human Rights Act¶

2.9. Employment Equity Act¶

2.10. Content Review¶

  • Under the Canada Pension Plan Act and the Employment Insurance Act, the Canada Revenue Agency is responsible for determining: - whether or not an individual’s employment is pensionable under the Canada Pension Plan Act or insurable under the Employment Insurance Act - the types of earnings that are considered pensionable or insurable - how many hours an insured person has in insurable employment - the recovery of any debts owed as a result of an overpayment of Canada Pension Plan, Employment Insurance, or Old Age Security benefits

  • The Canada Revenue Agency is responsible for ensuring that Canada Pension Plan contributions and Employment Insurance premiums are deducted, remitted, and reported as required by legislation.

  • The Canada Revenue Agency collects provincial/territorial income taxes on behalf of all provinces/territories except QuĂ©bec.

  • Revenu QuĂ©bec collects the provincial income tax for the province of QuĂ©bec.

  • Employers who remit withholdings or deductions late, withhold the statutory deductions but do not remit them, or fail to deduct the required deductions will be subject to penalties, which may increase on subsequent occurrences, plus interest charges.

  • All monies deducted on behalf of the Canada Revenue Agency are considered to be held “in trust” for the Receiver General.