################################## PAYROLL COMPLIANCE ################################## 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. 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. .. admonition:: 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. 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. .. admonition:: 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. 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 Québec, 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. Québec collects its own provincial income tax. There are two separate income tax deductions withheld from Québec employees — one for federal income tax and the other for Québec provincial income tax. The federal income tax is remitted to the CRA and the Québec provincial income tax is remitted to Revenu Québec (RQ). Québec employees will see *Federal Income Tax* and *Québec Income Tax* listed separately on their pay statements. RQ is discussed extensively in a later chapter. 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. Employment and Social Development Canada (ESDC) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Employment and Social Development Canada (ESDC), a department of the Government of Canada, is committed to building a stronger and more competitive Canada by supporting Canadians in making choices that help them live productive and rewarding lives and to improve their quality of life. To do this, the department: - develops policies that make Canada a society in which all can use their talents, skills and resources to participate in learning, work and their community - creates programs and support initiatives that help Canadians move through life's transitions—from families with children to seniors, from school to work, from one job to another, from unemployment to employment, from the workforce to retirement - creates better outcomes for Canadians through service excellence with Service Canada and other partners ESDC supports human capital development and labour market development; and is dedicated to establishing a culture of lifelong learning for Canadians. Some of their specific program responsibilities include: - Canada Pension Plan and Old Age Security - Employment Insurance - Employment Programs - Youth Employment Strategies - Canada Education Savings Program - Canada Student Loans and Grants ESDC is responsible for matters relating to: - amending the regulations made under the Canada Pension Plan and the Employment *Insurance Act* - keeping records of each individual's CPP contributions and pensionable earnings - the establishment of annual maximum insurable earnings - the administration of provisions related to Wage Loss plans - the administration of provisions regarding Job Creation programs Almost all of today's seniors receive income from Canada's public pensions. Basic financial support is also available to survivors, people who become too disabled to work, and their children. These pensions and benefits are delivered through the Canada Pension Plan (CPP) and Old Age Security (OAS) programs. Together, the CPP and OAS programs provide a modest base upon which Canadians can build their retirement income. The amount of CPP benefits is based on an individual's CPP contributions. Employees between the ages of 18 to 70 years old make contributions that are calculated on their annual pensionable earnings between a minimum and a maximum amount. The minimum amount is frozen at $3,500, while the maximum pensionable earnings are set each January, based on increases in the average wage in Canada. Employment Insurance (EI) is the program with the greatest impact on payroll. This program provides temporary financial assistance for unemployed Canadians while they look for work or upgrade their skills. It also provides coverage for Canadians who are sick, pregnant or caring for a newborn or adopted child. Individuals who must care for a family member who is seriously ill with a significant risk of death may also be assisted by Employment Insurance benefits. Application of the EI rules will be looked at in more detail in another chapter. The first Unemployment Insurance (UI) Act was passed into law in 1940, and was based on the British Unemployment Insurance Act, 1935. Since that time, the UI Act has been repealed and replaced four times - in 1955, 1971, 1985, and most recently in 1996. Clarifying details on how the act is to be applied are found in the EI Regulations, which are amended as required. The purpose of the act is to provide income support during a temporary interruption of earnings with the emphasis on returning the unemployed to the labour force as quickly as possible. Contributions to the plan and the amount of benefits are based on a percentage of insurable earnings. The ceiling on insurable earnings is reviewed annually to keep pace with increases in average income and the cost of living. The premium rates payable by an insured employee and the employer are also determined annually. Service Canada ~~~~~~~~~~~~~~~~~ Service Canada (SC) was created by the federal government in 2005 with the goal of providing easy-to-access, one-stop personalized service to Canadians. The agency integrates services from a number of federal departments to form a service delivery network. These services often touch all aspects of the lives of Canadians: from parental and pension benefits, to matching employers with job seekers, and obtaining a Social Insurance Number. Service Canada serves as the government's operational arm while Employment and Social Development Canada (ESDC) operates as the policy-making body. ESDC makes the rules for the various programs while Service Canada delivers the programs. Some of Service Canada's program responsibilities include: - the issuance of Social Insurance Numbers (SIN) and the protection and security of SIN information - the delivery of services to employers, including Record of Employment on the Web the administration of Employment Insurance programs to individuals, including regular, illness, pregnancy/parental, critically ill or injured person and compassionate care benefits - the administration of the Employment Insurance Premium Reduction program, including granting qualified employers a reduced Employment Insurance premium rate - the administration of Canada Pension Plan benefits, including retirement, disability, survivor, children's and death benefits - the administration of benefits for seniors, including the Old Age Security Program and the Guaranteed Income Supplement Through the Canada Pension Plan program, SC administers the payment of CPP benefits. These payments have little impact on payroll. The biggest impact Service Canada has on payroll is through the administration of the Record of Employment program and the Social Insurance Number. Payroll is responsible for deducting and remitting EI premiums on behalf of employees and employers. They are also responsible for capturing information related to insurable earnings and hours, and reporting that information on the Record of Employment, which is explained in detail in a later chapter. Social Insurance Number (SIN) ------------------------------ The Social Insurance Number (SIN) Program was introduced by Parliament in 1964 to register people with the Unemployment Insurance Commission (now known as Employment Insurance) and the Canada Pension Plan. In 1967, the SIN also became a file identifier for Revenue Canada (now known as the Canada Revenue Agency). Under the Employment Insurance Act, every person who works in Canada is required to have a Social Insurance Number. As an employer, you must ask new employees to provide their SIN when they are hired. According to the Employment Insurance Regulations which came into force on April 30, 2013, employees are required by law to provide their SIN; they may do so by presenting a SIN card or the Confirmation of SIN letter. It is important that you obtain the correct SIN of your employee so that payroll can report accurate statutory withholdings for Canada Pension Plan contributions, Employment Insurance premiums, and income tax on the employee's information slips at the end of the year. To apply for a Social Insurance Number, individuals must complete an application form that can either be obtained from a SC office or downloaded from their website. Documents proving the individual's identity and status in Canada must also be submitted with the application. The documents must be originals and written in English or French. Social Insurance Numbers beginning with a "9" (commonly called 900-series) are issued to individuals who are neither Canadian citizens nor permanent residents, but need a SIN for employment purposes. All 900-series SIN cards/letters carry an expiry date that is the same as the expiry date on the individual's work permit. Individuals must apply for new documentation prior to expiry. Employees who are not residents of Canada, who are in regular continuous employment, and are in possession of a 900-series SIN, are subject to all applicable statutory deductions. Statistics Canada ~~~~~~~~~~~~~~~~~~~~~ Personal Privacy ~~~~~~~~~~~~~~~~~ The Privacy Principles ----------------------- The Personal Information Protection and Electronic Documents Act (PIPEDA) -------------------------------------------------------------------------- Pension Benefits Standards Act ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Canadian Human Rights Act ~~~~~~~~~~~~~~~~~~~~~~~~~~ Employment Equity Act ~~~~~~~~~~~~~~~~~~~~~~~~~~ Summary ~~~~~~~~~~~~~~~~ - 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 Québec. - Revenu Québec collects the provincial income tax for the province of Québec. - 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. - Employment and Social Development Canada is responsible for matters relating to: - amending the regulations made under the Canada Pension Plan and the Employment Insurance Act - keeping records of each individual's Canada Pension Plan contributions and pensionable earnings - the establishment of annual maximum insurable earnings - the administration of provisions related to Wage Loss plans - the administration of provisions regarding Job Creation programs Employment and Social Development Canada’s Employment Insurance program provides temporary financial assistance for unemployed Canadians while they look for work or upgrade their skills. Service Canada serves as the government’s operational arm while Employment and Social Development Canada operates as the policy-making body. Service Canada is responsible for: o the issuance of Social Insurance Numbers (SIN) and the protection and security of SIN information o the delivery of services to employers, including Record of Employment on the Web o the administration of Employment Insurance programs to individuals, including regular, illness, pregnancy/parental, critically ill or injured person and compassionate care benefits o the administration of the Employment Insurance Premium Reduction program, including granting qualified employers a reduced Employment Insurance premium rate - the administration of Canada Pension Plan benefits, including retirement, disability, survivor, children's and death benefits - the administration of benefits for seniors, including the Old Age Security Program and the Guaranteed Income Supplement Payroll is responsible for deducting and remitting Employment Insurance premiums on behalf of employees and employers. Payroll is responsible for capturing information related to insurable earnings and hours, and reporting that information on the Record of Employment. Review Questions ~~~~~~~~~~~~~~~~~~~~~ 1. What are the three main programs specifically related to payroll that the Canada Revenue Agency administers? 2. If an organization deducts $27,400 in Canada Pension Plan contributions from its employees and $21,200 in Employment Insurance premiums, how much would have to be remitted in total to the Canada Revenue Agency? 3. True or False: The Canada Revenue Agency collects provincial/territorial income taxes for all provinces and territories. 4. True or False: The emphasis of the Employment Insurance program is on paying people so they don't have to return to work. 5. Indicate which federal department or agency would be responsible in the following scenarios. An employer is preparing the budget for the next year and wants to know the annual maximum insurable earnings amount. An employee wants to retire and apply for Canada Pension Plan benefits. There is a new type of earning in the new collective agreement. You are not sure if it is insurable. The organization would like to apply for a reduction in its Employment Insurance premium rate.