CanadianPayroll/docs/build/html/_sources/2_compliance.rst.txt

##################################
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)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Service Canada
~~~~~~~~~~~~~~~~~

Social Insurance Number (SIN)
------------------------------

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
~~~~~~~~~~~~~~~~~~~~~~~~~~

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 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.