CanadianPayroll/docs/source/compliance.rst

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PAYROLL COMPLIANCE AND REGULATIONS
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**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

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. 

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.

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

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. 

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.

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)

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.

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.

Review Questions
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What is the primary objective of the payroll department? 

List four definitions of payroll.