Expanding your business into Canada can help increase your reach and generate more brand recognition and revenue. But it also means the likelihood that you’ll need to hire a few employees, which in turn means you’ll need to understand the basics of Canadian payroll and taxes.

If you’re going to hire employees in Canada, you’re going to need to pay them following Canadian payroll rules and guidelines. Use this guide to start your journey to handling payroll in house or to better understand the work your Canadian payroll provider should be doing on your behalf. 

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The First Step: Setting up Canadian Payroll

Before you can conduct payroll, you must collect a few pieces of key information from your Canadian employees. They’ll need to provide you with a social insurance number (SIN), as well as complete the federal and provincial TD1 forms to determine their tax withholdings. You’ll be required to obtain a business number from the Canada Revenue Agency (CRA). Once you have this number, you can open a payroll program account for your company, which you’ll need in order to remit tax deductions.

At the end of the year, you’ll report how much tax you collected on a T4 or T4A slip. Your employees must also be given one of these by the deadline set by the CRA.

Payroll 101: The Basics of Canadian Payroll Source Deductions 

Conducting payroll requires more than just writing a cheque for an employee’s wages. You must make the appropriate mandatory source deductions.

There are a few distinct differences to consider between payroll in the US and payroll in Canada. For example, in the US, taxes are calculated for federal, state, Social Security, and more. In Canada, you have to calculate an employee’s wages, then make the appropriate payroll tax deductions, including federal and provincial income tax. Additionally, you’ll need to collect Employment Insurance (EI) and Canada Pension Plan (CPP) dues. The CRA determines how much tax to collect from employees based on their classification (noted in the TD1 forms).

The taxes you collect from Canadian employees must be remitted to the Canada Revenue Agency (CRA).

Other Payroll Calculations and Deductions

Depending on which province you operate in, there could be other deductions. For example, holiday pay. You might also be required to provide certain leave days, such as bereavement days. Check the provincial laws to determine how much you need to pay, if at all. 

Canadian Payroll Regulations: Avoiding Payroll Errors

 In both Canada and the US, payroll remittance errors could cause problems for employers of any size. Even a simple calculation error could lead to penalties by the CRA that include fines, interest, and other fees.

Payroll regulations you must follow in Canada include collecting accurate deductions every pay period. The pay stubs you supply to your employees must clearly indicate how much you deducted from each individual income source. If someone earns a base salary, plus commission, you are required to indicate how much you’ve deducted from each one.

You can verify how much you should be deducting for EI, CPP, and income tax by checking the appropriate provincial or territorial tax table. You can also use a deduction calculator.

Check for Exceptions

Exceptions to the rules make Canadian payroll even more complex. For example, employees under the age of 18 don’t qualify for CPP. And if an employee is over the age of 70, he/she can’t contribute to the government-operated pension plan.

Overwhelmed? Partner with a PEO

Learning Canadian payroll and taxes takes time, which many international employers choose to outsource payroll and taxes by partnering with a professional employer organization (PEO). A PEO makes it easy for you to expand into Canada while ensuring you manage Canadian employees compliantly.