CanadianPayroll/docs/build/html/_sources/compliance.rst.txt

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PAYROLL COMPLIANCE AND REGULATIONS
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**LEARNING OBJECTIVES**

This chapter provides a comprehensive introduction to the fundamentals of payroll compliance and regulations in Canada. 
It outlines the key stakeholders involved, the core objectives of payroll, and the legal frameworks that shape payroll 
operations. The differences between federal and provincial/territorial jurisdictions are clearly explained, with emphasis on 
how each level of government influences payroll administration. The chapter also examines the Canada Revenue Agency's 
criteria for determining whether an individual is considered an employee or self-employed, providing essential context for 
accurate classification and compliance.

Topics covered in this chapter are:

  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 an essential operational function in any organization that employs staff, ensuring individuals are compensated 
appropriately for their work. The payroll process is subject to a robust framework of legislation. Both federal and 
provincial/territorial governments enact regulations that oversee various elements of payroll administration, 
including compensation practices, taxation of employee benefits, and the protection of worker rights. These legal obligations 
help establish consistency, accountability, and fairness in how employee remuneration is managed across sectors.

For the purposes of this course, payroll refers specifically to the process of compensating employees for work performed 
within the framework of an employer-employee relationship. Individuals who are self-employed or work as contractors submit 
invoices for their services and are paid through accounts payable, not through the payroll system — and therefore are not 
considered employees. This chapter explains how to assess whether a true employee-employer relationship exists. Once that 
relationship is confirmed, the appropriate method of payment can be accurately identified and applied.

Various levels of the governments offer specific criteria that help determine whether an employee-employer 
relationship is in place. Understanding the nature of this relationship is essential when evaluating a worker's status within 
an organization. Once the relationship is clearly identified, it becomes possible to ensure that payments made to the 
individual are handled in full compliance with applicable legislation. This distinction plays a vital role in payroll 
administration and helps prevent legal or financial errors tied to misclassification.

Payroll Objectives
------------------

The payroll function plays a vital role in every organization, with its primary objective being to ensure employees are 
compensated accurately and on time, in accordance with legislative requirements throughout the full annual payroll cycle.

Employees expect to receive their pay as scheduled and in the method agreed upon with their employer, whether by cheque or 
direct deposit. Beyond ensuring timely payment, payroll practitioners are also responsible for effectively communicating 
payroll-related information to all relevant stakeholders, supporting transparency, compliance, and organizational 
accountability.

**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, 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 working with federal and provincial or territorial government agencies, payroll professionals must be well-versed in 
the various laws and regulations that govern payroll operations, as well as the compliance requirements specific to each. 
It is their responsibility to ensure the organization adheres to all applicable legislation, thereby minimizing the risk of 
fines or legal penalties.

In addition to government regulations, payroll practitioners must also comply with obligations set forth by non-government 
stakeholders. These may include collective agreements with unions, group insurance policies, pension plans, and other 
contractual arrangements. Maintaining compliance across all stakeholder requirements is essential to the integrity and 
effectiveness of the payroll function.

Responsibilities and Functions of Payroll
---------------------------------------------------

The responsibilities of a payroll practitioner can vary significantly based on the size and structure of the organization, 
the jurisdictions in which employees are paid, and the presence of other supporting departments such as human resources, 
finance, and administration. These factors influence both the scope and complexity of payroll duties within the organization.

In small and medium-sized organizations, payroll practitioners often take on multiple roles that would typically be divided 
among separate departments in larger companies. Their responsibilities may extend beyond payroll to include tasks such as 
employee recruitment, human resources policy development, benefits administration, accounts payable and receivable, budgeting, 
and general administrative functions. In these settings, a broad and thorough knowledge of all assigned areas is essential, 
along with an understanding of the resources available to seek advice or guidance when needed.

In contrast, larger organizations tend to maintain dedicated payroll departments, supported by separate teams for human 
resources, accounting, and administration. Even within these multi-departmental structures, payroll professionals must possess 
a strong understanding of the employee life cycle. From onboarding through to termination, each stage carries specific 
implications for pay processing and reporting, requiring close coordination and specialized expertise.

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 normally requires performing the following 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**

Payroll professionals must possess a strong set of technical skills to perform their roles effectively. These include 
proficiency in payroll software and financial systems, as well as competence in commonly used computer applications such as 
spreadsheets, databases, and word processing programs. Mastery of these tools ensures accurate processing, reporting, and 
management of payroll-related data.

As organizations evolve and adapt to new technologies and reporting requirements, payroll and business systems are frequently 
updated or replaced. Therefore, it is essential for payroll personnel to remain flexible and open to change. A successful 
payroll practitioner should demonstrate a willingness to embrace continuous learning and stay current with system upgrades and 
best practices. This adaptability not only enhances performance but also supports long-term career growth in an ever-changing 
professional landscape.

**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.

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.

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.

Legislations and Regulations
-----------------------------

Federal and provincial/territorial legislation, and amendments to existing legislation and
regulations, can affect the operations of a payroll department, as the requirement to comply
with the new or amended legislation must be satisfied.

Legislation determines what the rules are, while regulations determine how the rules are to be
applied. 

The methods for calculating income tax deductions are specified by the federal government
through regulations.

    *Example:*

    *The Income Tax Act*

    The legislation: Specifies that employers are required to withhold income tax from employees.

    The regulation: Specifies the taxation methods that should be used for non-periodic payments such as bonuses, retroactive pay increases, lump sum payments, etc.

    *Non-periodic bonus payments*
    
    Where a payment in respect of a bonus is made by an employer to an employee whose total remuneration (including the bonus) from the employer 
    may reasonably be expected to exceed $5,000 in the taxation year of the employee in which the payment is made, the amount to be deducted or withheld by the employer is dictated 
    through a calculation prescribed in the regulation within the Act.

Legislative change can prove to be anything but routine, particularly if the change is
implemented at a time other than at the beginning of a calendar year, or involves some sort of
retroactivity. The change may involve a series of adjustments to individual payroll accounts
and extra work for the payroll department to finalize reconciliations and year-end balancing
requirements.

In general, legislation, and in particular, labour legislation, is constantly being changed,
amended, repealed or revised. As a result, it is essential to keep up-to-date with the changes
in the jurisdiction(s) in which your organization operates.

Changes in legislation are generally publicized in the media. In large organizations, human
resource departments, tax specialists and corporate legal departments often provide this type
of information. However, in both large and small organizations, the payroll practitioner
should be proactive in keeping abreast of changes and bringing them to the attention of those
involved. There are many ways to keep informed of changes that impact payroll.

The following are some of the available resources:

  - The Canadian Payroll Association offers a phone and email information service, Payroll InfoLine, for members' payroll related questions. The Association also has a website for members, www.payroll.ca, that contains guidelines, legislative updates and other useful payroll related information. As well, the Association is available on Twitter(@cdnpayroll), LinkedIn (The Canadian Payroll Association) and Facebook (@canadianpayroll).

  - The Canada Revenue Agency (CRA) produces guides, publications, Income Tax Bulletins, folios and Circulars, posts news bulletins and enables participation on an electronic mailing list with e-mail alerts for new content to the Canada.ca website.

  - The Revenu Québec (RQ) website provides guides, publications, bulletins, forms, online services and enables participation on an electronic mailing list with e-mail notifications of tax news articles - https://www.revenuquebec.ca/en/

  - Employment/labour standards (federal, provincial and territorial) publications and websites. Each jurisdiction has a website providing information on their employment/labour standards. For example, the websites for Alberta and Québec are: Alberta - https://www.alberta.ca/employment-standards.aspx Québec - www.cnt.gouv.qc.ca/en

  - Employment and Social Development Canada (ESDC) and Service Canada (SC) publications including information regarding the Employment Insurance (EI) program and the Social Insurance Number - www.canada.ca

  - CCH Canada Limited publishes a series of volumes on employment and labour law, pensions and benefits, etc., that supplies information on legislation with regular updates as changes become law - www.cch.ca

  - Carswell publishes The Canadian Payroll Manual and offers a phone and email service to subscribers - www.carswell.com

Legislative Compliance
~~~~~~~~~~~~~~~~~~~~~~~

In addition to payroll's primary role of paying employees accurately and on time, payroll
practitioners are also directly or indirectly responsible for supporting and/or ensuring
compliance with the requirements of various government acts. Where legislation requires
employer compliance (for example, remittance of payroll source deductions, Canada Pension
Plan contributions, Employment Insurance premiums, and federal and provincial/territorial
income tax deductions) there are financial penalties or the possibility of legal action to
encourage compliance.

Fines, penalties and interest charges are typically a result of audits and legal action. These
may result in seizure of bank accounts and/or assets, fines of $1,000 to $25,000, and in some
cases, jail sentences up to 12 months.

Government departments and agencies responsible for administering legislation employ a
variety of systems for tracking compliance. Some systems, such as the monitoring of source
deduction remittances, are ongoing, with regimented reporting time frames that lay down a
continual audit trail. Failure to meet the requirements of this legislation will incur a rapid
response that may result in fines and penalties.

Reporting requirements that do not involve ongoing, regular reporting may not impose an
immediate fine but may initiate a visit from an auditor or other official seeking compliance.

Some compliance systems operate quarterly or annually, and the observations raised by these
systems will result in requests for additional information or explanation and, in some cases, a
request for a supplementary payment and/or a fine. 

    *Example:*

    **Record of Employment (ROE)** issuance
    Failure to issue a ROE within the established deadlines may result in a visit from an investigative officer from Service Canada.

    The Canada Revenue Agency's Pensionable and Insurable Earnings Review (PIER) is an annual compliance review system. This system utilizes the data provided on the T4 
    information slips issued at year-end to validate the amounts of CPP contributions and EI premiums deducted by employers, and identifies any remittance deficiencies.

Self-Assessment
~~~~~~~~~~~~~~~

Both the federal and provincial/territorial tax systems are based on the principle of selfassessment. This means that 
taxpayers and their agents, including employers, are responsible for calculating, reporting and remitting their 
contributions and the amounts withheld within the prescribed deadlines.

As administrators of the tax system, the Canada Revenue Agency (CRA) and Revenu Québec (RQ) must ensure that each individual 
and organization is compliant and pays all of the amounts owing.

Both the CRA and RQ recognize that taxpayers and agents are entitled to plan their affairs so
that they pay only the amounts that are legally due. It is acceptable to take advantage of tax
rules to minimize the amount of taxes paid. It is not lawful, however, to evade taxes owed by
failing to report income, failing to remit taxes due or providing the CRA or RQ with false information.

The Employee-Employer Relationship
-----------------------------------

In all situations, it is necessary to establish whether the relationship between the worker and
the organization is one of an employee and an employer or if the worker is self-employed.
This relationship determines the requirement for statutory withholdings and the requirement
for compliance with related legislation. The Canada Revenue Agency (CRA) has established
factors to assist in determining whether or not this relationship exists. It is not up to the
worker to decide whether or not they are an employee, subject to statutory withholdings.

Payroll can take a proactive role in communicating the importance of determining the
existence of the employee-employer relationship to all areas of the organization.
When an employee-employer relationship exists, payroll has a compliance responsibility
related to statutory withholdings, which requires that all employees have the appropriate
statutory deductions withheld from their pay and remitted to the government.

Where an employee-employer relationship exists, the CRA requires the employer to:

  - register with the Canada Revenue Agency for a Business Number (BN)
  - withhold the statutory deductions of income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums on amounts paid to employees
  - remit the amounts withheld as well as the required employer's share of CPP contributions and EI premiums to the Canada Revenue Agency
  - report the employees' income and deductions on the appropriate information return
  - give the employees copies of their T4 slips by the end of February of the following calendar year

Information on the factors to consider when determining whether an employee-employer relationship exists can be found in the 
Canada Revenue Agency guide, Employee or Self-Employed? - RC4110. The guide is available on the CRA's website,
https://www.canada.ca/en/revenue-agency.html.

Contract of Service (Employment)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
A **contract of service** is an arrangement whereby an individual (the employee) agrees to
work on a full-time or part-time basis for an employer for a specified or indeterminate period
of time.

Under a contract of service, one party serves another in return for a salary or some other form
of remuneration.

Contract for Service (Subcontracting)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

A **contract for service** is a business relationship whereby one party agrees to perform certain
specific work stipulated in the contract for another party. It usually calls for the
accomplishment of a clearly defined task but does not normally require that the contracting
party do anything him/herself. A person who carries out a contract for service may be
considered a contract worker, a self-employed person or an independent contractor.

A business relationship is a verbal or written agreement in which a self-employed individual
agrees to perform specific work for a payer in return for payment. There is no employer or
employee. The self-employed individual generally does not have to carry out all or even part
of the work himself. In this type of business relationship, a contract for services exists.

The self-employed individual is required to produce a given result within a period of time in
the manner he deems most appropriate. While performing the work, he is not under the
orders or control of the person for whom he is doing the work and he can use his own
initiative in matters that are not specified or determined at the outset. The payer is not
normally involved in the performance of the work and, therefore, has no control over it.

Under a contract for service, a self-employed individual assumes the chance of profit and risk
of loss. By agreeing, before he is engaged, to establish the overall cost of the work to be
done, owning his tools and instruments and being solely responsible for the manner in which
the work is done, the self-employed individual assumes all risk of loss resulting from events
that occur during the course of the work which were not, or could not, be foreseen when the
contract was negotiated. If, on the other hand, the work is completed sooner or more easily
than expected, the contractor's profit will be greater.

A contract for service is often used when an organization wishes to have work done which
does not fall within its usual scope of operations. The relationship between a payer and a
self-employed individual and that between an employer and their employees are sometimes
quite similar. The main difference between the two relationships is that, in a contract for
service, the party paying for the service is entitled to dictate what is to be done or what result
is to be achieved; whereas, in a contract of service, the employer is also entitled to stipulate
the manner in which the work is to be done.

Under a contract for service, the person for whom the work is being done exercises general
supervision. He can and should see that the work is completed in accordance with the
agreement, but it is not up to him to give orders to the self-employed individual regarding the
manner in which the work is to be done. The mere fact that a self-employed individual
receives general instructions from the project manager concerning the work to be done does
not mean that he can be considered an employee.

An employee-employer relationship is deemed to exist where the organization exercises, or
has the right to exercise, direct control over the individual. If the organization is unsure as to
whether or not a relationship exists, the Canada Revenue Agency (CRA) form Request for a
CPP/EI Ruling - Employee or Self-Employed?  - CPT1 should be submitted to the CRA. A
sample of the CPT1 form is provided at the end of this section.

Independent contractors or self-employed individuals are not considered employees of the
organization provided no employee-employer relationship exists. Persons who are truly selfemployed individuals will submit invoices and be paid through accounts payable. However,
the submission of an invoice to accounts payable is not sufficient to determine if the
individual is self-employed.

Factors Determining the Type of Contract
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The CRA uses a two-step approach to examine the relationship between the worker and the
payer for relationships outside the province of Québec. The approach used for relationships
in the province of Québec will be discussed in a later chapter.

**Step 1:**
The first step is to establish what the intent was when the worker and the payer entered into
the working arrangement. Did they intend to enter into an employee-employer relationship
(contract of service) or did they intend to enter into a business relationship (contract for
service). The CRA must determine not only how the working relationship has been defined
but why it was defined that way.

**Step 2:**
The CRA then considers certain factors when determining if a contract of service or a
contract for service exists. In order to understand the working relationship and verify that the
intent of the worker and the payer is reflected in the facts, they will ask a series of questions
that relate to the following factors:

 - the level of control the payer has over the worker
 - whether or not the worker provides the tools and equipment
 - whether the worker can subcontract the work or hire assistants
 - the degree of financial risk taken by the worker
 - the degree of responsibility for investment and management held by the worker
 - the worker's opportunity for profit
 - any other relevant factors, such as written contracts

The CRA will look at the answers independently and then together and consider whether or
not they reflect the intent that was originally stated. Considered individually, the response to
each of these questions is not conclusive; however, when weighed together, certain
conclusions may be drawn. When there is no common intent, the CRA will decide if the
answers are more consistent with a contract of service or a contract for service.
Each of these factors will be discussed in the material and indicators showing whether the
worker is an employee or self-employed will be provided.

Control
~~~~~~~

The ability, authority or right to exercise control over a worker concerning how the work is
done and what work is done is one of the factors considered, as is the degree of independence
held by the worker. Both the payer's control over the worker's daily activities and the payer's
influence over the worker will be examined. The relevant factor is the payer's right to
exercise control. Whether the payer actually exercises this right is irrelevant.

Worker is an *Employee* when:

  - The relationship is one of subordination.
  - The payer will often direct, scrutinize, and effectively control many elements of how the work is performed.
  - The payer controls both the results of the work and the method used to do the work.
  - The payer determines what jobs the worker will do.
  - The worker receives training or direction from the payer on how to do the work. 

Worker is a *Self-Employed* when:

  - Individual usually works independently, does not have anyone overseeing them.
  - The worker is usually free to work when and for whom they choose and may provide their services to different payers at the same time.
  - The worker can accept or refuse work from the payer.
  - The working relationship between the payer and the worker does not present a degree of continuity, loyalty, security, subordination, or integration.

Tools and Equipment
~~~~~~~~~~~~~~~~~~~~

Ownership of tools and equipment is not, in itself, a determining factor relating to
establishing the type of contract in effect. The fact that workers use their own equipment
when performing their work is not sufficient to conclude that they are self-employed.
Self-employed individuals often supply the tools and equipment necessary to complete a
contract, making their ownership commonly associated with a business relationship; however
employees can also be required to provide their own tools.

In an employee-employer relationship, the employer generally supplies the equipment and
tools required by the employee. In addition, the employer covers the following costs related
to their use: repairs, insurance, transport, rental and operation (for example, fuel).

In some trades, however, it is normal for employees to supply their own tools. This is
generally the case for auto mechanics, painters and carpenters. Similarly, employed computer
scientists, architects and surveyors sometimes supply their own software and instruments.

In a business relationship, workers generally supply their own equipment and tools and cover
costs related to their use. When workers purchase or rent equipment or large tools that
require a major investment and costly maintenance, it usually indicates that they are selfemployed individuals as they may incur a financial loss when replacing or repairing their
equipment.

The relevance of the ownership of tools and equipment is in the size of the investment along
with the cost of repair, replacement and insurance. 

The worker is an employee when:

  - The payer supplies most of the tools and equipment. 
  - The payer retains the right of use over the tools and equipment provided to the worker.
  - The worker supplies the tools and equipment and the payer reimburses the worker for their use

The worker is a self-employed individual when:

  - The worker provides the tools and equipment required and is responsible for the cost of repairs, insurance and maintenance and retains the right over the use of these assets.
  - The worker supplies his or her own workspace, is responsible for the costs to maintain it, and does substantial work from that site.

Subcontracting Work or Hiring Assistants
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

As subcontracting work or hiring assistants can affect a worker's chance of profit or risk of loss, this can help determine the type of business relationship. 

The worker is an employee when:

  - The worker cannot hire helpers or assistants.
  - The worker must perform the services personally.

The worker is a self-employed individual when:

  - The worker does not have to perform the service personally.
  - They can hire another party to complete the work, without consulting with the payer.

Financial Risk
~~~~~~~~~~~~~~

The CRA will examine if there are any fixed ongoing costs incurred by the worker or any
expenses that are not reimbursed. Employers will usually reimburse employees for any
expenses incurred in the performance of their job. Self-employed individuals can have
financial risk and incur losses as they usually have ongoing monthly expenses whether or not
work is being performed. Both employees and self-employed individuals may be reimbursed
for business or travel expenses, however it is the expenses that are not reimbursed that are
examined.

The worker is an employee when:

 - The worker is not usually responsible for any operating expenses.
 - The worker is not financially liable if he or she does not fulfill the obligations of the contract.
 - The payer determines and controls the method and amount of pay.

The worker is a self-employed individual when:

  - The worker is financially liable if he or she does not fulfill the obligations of the contract.
  - The worker does not receive any protection or benefits from the payer.
  - The worker hires helpers to assist and pays them.
  - The worker advertises the services offered.

Responsibility for Investment and Management
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

If the worker is required to make an investment in order to provide the services, this is
evidence that a business relationship may exist. Another factor indicating the existence of a
contract for service is if the worker is responsible for making the business decisions that
affect their profits or losses.

The worker is an employee when:

  - The worker has no capital investment in the business.
  - The worker does not have a business presence.

The worker is a self-employed individual when:

  - The worker has capital investment, manages his or her staff, hires and pays individuals to help perform the work, and has established a business presence.

Opportunity for Profit
~~~~~~~~~~~~~~~~~~~~~~~~~

A business relationship likely exists where the worker can realize a profit or incur a loss as
this indicates the worker controls the business aspects of the services rendered. Selfemployed individuals have the ability to accept contracts as they wish. They can negotiate
the rate for their work and can accept more than one contract at the same time. In order to
carry out the terms and conditions of their contract, they often incur expenses which they
must manage to increase their profit.

Employees normally do not have a chance of profit or a risk of loss. While some employees
who are paid by commission have an opportunity to increase their earnings based on their
sales, this is not a profit as it is not an excess of income over expenses. As well, employees
generally do not share in profits or suffer losses incurred by the business they work for.

The CRA will look at the degree to which the worker can control their revenues and
expenses. They will also look at the method of payment. Employees are typically guaranteed
their earnings according to an established rate (hourly, daily, weekly, annual) and pay
frequency. While self-employed individuals may be paid on an hourly basis, if they are paid
a flat rate for the work performed, it generally indicates a business relationship, especially if
they incur expenses while performing the services.

The worker is an employee when:

  - The worker is not in a position to realize a business profit or loss.
  - The worker is entitled to benefit plans that are normally only offered to employees.

The worker is a self-employed individual when:

  - The worker is compensated by a flat fee.
  - The worker can hire and pay a substitute.

The worker is an employee when:

The worker is a self-employed individual when:

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.

A contract of service is an arrangement in which an individual, referred to as the employee, agrees to work either full-time or part-time for an employer over a specified or indeterminate period. This type of contract establishes an employer-employee relationship, where the employer typically has control over the work performed and the conditions under which it is carried out.

In contrast, a contract for service defines a business relationship where one party agrees to perform specific tasks or services outlined in the contract for another party. This arrangement is more independent in nature and does not constitute an employer-employee relationship. Instead, it reflects a client-contractor dynamic.

To determine the nature of the relationship between a worker and a payer—particularly outside the province of Québec—the Canada Revenue Agency (CRA) applies a two-step approach. One of the key factors considered is the payer’s right to exercise control over the worker, including how the work is done and what tasks are performed. The degree of independence the worker holds is also evaluated, but the central issue is whether the payer has the authority to direct the work.

Another factor the CRA examines is the ownership of tools and equipment. The significance lies in the size of the investment made by the worker, as well as the costs associated with repair, replacement, and insurance. The CRA also considers whether the worker incurs fixed ongoing costs or unreimbursed expenses, which may indicate a greater level of independence.

Finally, the CRA assesses the extent to which the worker can control their revenue and expenses. A higher degree of financial control typically suggests a contract for service, while limited control may point to a contract of service. These factors collectively help determine the correct classification of the working relationship for tax and legal purposes.

Review Questions
----------------

What is the primary objective of the payroll department?

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

List four definitions of payroll.

    - 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

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

    Payroll management stakeholders are government (federal and provincial/territorial), internal 
    (employees, employers and other departments) and external (benefit carriers, courts, unions, pension 
    providers, charities, third party administrators and outsource/software vendors).

Explain the difference between legislation and regulation.

    Legislation determines what the rules are, while regulations determine how the rules are to be applied. 

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

    The Canadian Payroll Association offers Payroll InfoLine, a phone-in and e-mail information service for members

      - The Canada Revenue Agency (CRA) produces guides, publications and Income Tax Bulletins, folios and Circulars, posts news bulletins and enables 
      participation on an electronic mailing list with e-mail alerts for new content to the site
      - The Revenu Québec (RQ) website provides guides, publications, bulletins, forms, online services and enables participation on an electronic mailing list with e-mail notifications of tax news articles 
      - Employment/labour standards (federal, provincial and territorial) publications and websites
      - Employment and Social Development Canada (ESDC) and Service Canada (SC) publications including information regarding the Employment Insurance (EI) program and the Social Insurance Number
      - CCH Canada Limited publishes a series of volumes on employment and labour law, pensions and benefits, etc., that supplies information on legislation with regular updates as changes become law
      - Carswell publishes The Canadian Payroll Manual and offers a phone-in service to subscribers

    Copies of legislation are available from the printing offices of the federal, provincial and territorial governments as well as through government websites. 

List three external stakeholders and explain their compliance requirements. 

    Benefit Carriers - 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 - Payroll must accurately deduct and remit amounts ordered to be withheld through garnishments, third party demands, requirements to pay and support deduction orders.
    Unions - Payroll must accurately deduct and remit union dues and initiation fees, and ensure that the terms of the collective agreement are adhered to.
    Pension Providers - Third party pension plan providers may require payroll to provide enrolment reports on participating employees and length of service calculations, and to remit employee deductions and employer contributions.

Indicate the jurisdiction the following employees fall under:

  - Canada Post Corporation (F)
  - An insurance company (P)
  - A uranium mining company (F)
  - Canadian Broadcasting Corporation (F)
  - A retail department store with locations in every province (P)
  - A chartered bank (F)

What is the difference between a contract of service and a contract for service? 

    A contract of service is an arrangement whereby an individual (the employee) agrees to work on a full-time or part-time basis for an employer for a specified or indeterminate period of time.
    
    A contract for service is a business relationship whereby one party agrees to perform certain specific work stipulated in the contract for another party. 

What are the factors that the Canada Revenue Agency (CRA) considers when
determining if a contract of service or a contract for service exists? 

Please consider the following scenario.

    You are a payroll professional working for a large manufacturing company. Your
    organization has had many change initiatives over the last number of years including
    three mergers and two large group terminations. Your company endorses the use of
    consultants rather than growing the number of permanent employees.

    Write a memo to your supervisor, who is the Chief Financial Officer of the company, to
    explain why your role must coordinate with the Accounts Payable Department to ensure
    that these payments are being handled correctly. Please prepare your answer in a separate
    document. 

    *At the last weekly Finance meeting, Tom and I discussed the increase in the number of contractor invoices being 
    processed through accounts payable (AP). We have some concerns as to whether these individuals would be considered truly 
    selfemployed by the Canada Revenue Agency (CRA), or whether the CRA would determine them to be employees.*

    *If the worker is considered self-employed, then payment, on submission of an invoice, will continue to be handled by AP. If, however, the worker is considered an
    employee, they would have to be set up on payroll, as they would be in receipt of income from employment, subject to all legislated statutory withholdings.*

    *I have attached the CRA's form Request for a CPP/EI Ruling - Employee or SelfEmployed? - CPT1 for your information. This form can be completed by the 
    company and sent with supporting documentation, such as the terms and conditions of the contract, for a ruling from the CRA on the individual's status.*

    *I think that Payroll must coordinate with the Accounts Payable Department to ensure that these payments are being handled correctly.*

    *Tom and I would be pleased to meet with you to ensure the company is in
    compliance with all legislative requirements. Would you be available next Friday
    morning at 10:00 to discuss?*