There are more than 15 million employees over the age of 25 in the country. Canada’s population is vibrant with highly skilled and educated workers that can bring value to organizations from all backgrounds either for products or services. International companies who choose to do business in Canada will undoubtedly have to make some decisions around managing Canada payroll compliance and logistics. Employers are responsible for the normal elements of payroll management, which include deducting Canada Pension Plan (CPP) contributions, employment insurance (EI) premiums, and income tax from their employees’ earned income.
To help your organization get started in Canada, we’ve pulled together the basics for understanding Canada payroll.
To start, your organization needs to determine its appropriate status and get properly registered in Canada. Once your status is determined, you will need to open a payroll program account.
Similar to an Employer Identification Number (EIN) in the United States, a payroll program account is an account number assigned to an organization in order to identify themselves when dealing with the Canada Revenue Agency.
After establishing your organization as a registered business in Canada with a payroll program account, you can start hiring employees. The next steps include ensuring your organization is managing the proper deductions to maintain compliance and avoid legal fines and penalties.
Canada has promulgated a number of mandatory requirements for the management of Canada payroll, but it is not as overwhelming as more highly restrictive countries. While not identical by any means, there are many similarities between Canada and the U.S., which can help your organization begin to quickly understand Canada payroll if you’re already operating in the States.
Canada requires social security contributions for all of its permanent employees and local nationals. This is technically considered part of taxation or an entitlement, along with the Canada Pension Plan and Employment Insurance.
• The maximum pension earning for the Canada Pension Plan in 2017 is Can$55,300
• The basic exemption amount for 2017 remains $3,500
• The employee and employer contribution rates for 2017 are 4.95% (Unchanged from 2016).
• The maximum contribution in 2017 by an employee is Can$2,564.10
• The maximum contribution in 2017 by an employer is also Can$2,564.10
New legislation to change the Canada Pension Plan was passed in December 2016 raising the contribution levels to help Canadians build more for retirement. There will be a gradual 7-year phase-in beginning in 2019.
• The employee contribution rate is 1.63%
• The employee and employer contribution rate is 2.282%
• The maximum insurable earnings limit is Can$51,300
• The maximum contribution in 2017 by an employee is Can$836.19
• The maximum contribution in 2017 by an employer is Can$1,170.67
Quebec has a different EI schedule which you can learn about here.
Foreign nationals working in Canada may be able to minimize their contributions under an applicable double tax treaty.
Canada has a progressive tax rate system. In 2016, the top federal tax rate for individuals was 33%. The rates continue as follows:
• 15% on the first Can$45,916 of taxable income +
• 20.5% on the next Can$45,915 of taxable income (on the portion of taxable income over $45,916 up to $91,831) +
• 26% on the next Can$50,522 of taxable income (on the portion of taxable income over $91,831 up to $142,353) +
• 29% on the next Can$60,447 of taxable income (on the portion of taxable income over $142,353 up to $202,800) +
• 33% on taxable income over Can$202,800 +
In addition, provincial tax rates apply in addition to the federal rate and vary by province. They range between 13% to 25%.
It’s common to reward bonuses to employees for individual performance and contribution to company goals. There are no restrictions or guidelines on the type or size of bonuses that can be awarded to employees, but the size and type of the bonus will impact the income tax consequences for the employee.
The Canada Revenue Agency’s (CRA) has a free payroll podcast, which is aimed at the Canadian payroll community and employers. The episodes cover important payroll topics such as reporting payroll deductions and other topics to help you further understand the payroll system.