How Payroll Actually Works in Canada

1. What Canadian payroll actually involves

Payroll is paying your people and keeping the CRA happy at the same time. You register as an employer. You withhold CPP, EI, and income tax from every paycheque. You remit those deductions on schedule. And at year-end, you file T4 slips and a T4 Summary.

That's the whole cycle. Everything else -- PD7A vouchers, box codes on T4s, reason codes on ROEs -- is just the format the CRA wants those answers in. The logic is simpler than the paperwork looks.

• Employer vs self-employed. Only employers run payroll. If you're a sole proprietor pulling money from your business, that's not payroll. But if you're incorporated and paying yourself a salary from your CCPC? That goes through payroll like any other employee.
• Employee vs contractor. Payroll is for employees. Contractors invoice you and get a T4A (or no slip at all). And no, you don't get to choose which one someone is. The CRA looks at control, tools, integration, and financial risk to decide.
• Incorporated vs not. Same payroll rules either way -- corporation, sole prop, or partnership. What changes is how the owner gets paid, not how the employees are paid.

2. How do you register as an employer?

Before you run your first pay, you need a CRA Business Number (BN) with an RP payroll program account. That's how the CRA tracks your remittances, your slips, and your remitter threshold. It's free. You can set it up online through My Business Account or by calling the CRA.

What you need before opening the account

• Legal name and structure. Your corporation name and incorporation number, or your sole proprietor name (plus your operating name if it's different).
• Business and mailing address. These need to match what's on record with the province of incorporation.
• First pay date and frequency. The CRA uses this to set your initial remitter threshold and due dates.
• Owner or director info. Name, SIN, and contact details for at least one responsible person.

Provincial registrations that come with it

The CRA is only half the picture. In Ontario, you'll likely need to register with one or two provincial programs once you hire. WSIB is mandatory for most industries -- you've got ten days from hiring your first worker. EHT kicks in when payroll approaches the $1 million exemption, so most small employers skip it until then.

Quebec is a different world entirely. Revenu Quebec handles QPP instead of CPP, QPIP alongside EI, and the RL-1 instead of the T4. This guide covers federal and Ontario rules only -- Quebec payroll has its own playbook.

3. What gets taken off every paycheque?

Three things come off before your employee sees a dollar: Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and federal plus provincial income tax. These are called "source deductions." And here's the part that surprises people -- you, the employer, owe money on top of what you withheld. CPP is a dollar-for-dollar match. EI is 1.4 times the employee's share.

Canada Pension Plan (CPP)

Both you and your employee contribute equally on pensionable earnings between $3,500 (the basic exemption) and the year's maximum pensionable earnings (YMPE). Since 2024, there's also CPP2 -- an extra contribution that kicks in between the first and second earnings ceilings (YMPE and YAMPE).

Employees under 18, over 70, or already collecting CPP retirement benefits may be exempt. And CPP has to be pro-rated in the year someone turns 18, turns 70, or elects to stop contributing. This is one of those details that payroll software usually handles -- but only if the dates are entered correctly.

Employment Insurance (EI)

EI applies on insurable earnings up to the annual maximum. Your cost as the employer? 1.4 times whatever the employee pays. So if an employee's EI deduction is $100, you owe $140 on top. Certain shareholders who control more than 40% of voting shares are exempt from EI on their own salary. Makes sense -- they can't collect EI anyway.

Federal and provincial income tax

Tax withholding is based on the employee's TD1 form (federal and provincial), their pay frequency, and gross pay. The CRA publishes its Payroll Deductions Online Calculator (PDOC) each year, and certified payroll software pulls the same rates automatically. If your employee works a second job, they can request extra tax on their TD1 so they don't get hit with a surprise bill in April.

4. When do you remit, and what's the PD7A?

You've withheld the deductions. Now you have to send them to the CRA. Your remittance schedule depends on your "average monthly withholding amount" (AMWA) from two calendar years ago -- not this year. That lag catches people off guard. A fast-growing business can sit on a low-frequency schedule for a full year past when its payroll outgrew it.

So what's the PD7A? It's the statement of account the CRA issues for your RP account. It shows what you owe, what you've already paid, and includes the remittance voucher. You don't fill it in -- it's the CRA's running tab.

Here's where it gets expensive. Late remittances are the single most costly payroll mistake in Canada. The penalty is 3% if you're 1-3 days late, 5% for 4-5 days, 7% for 6-7 days, and 10% after that. All on the full amount owed. Miss it again in the same year? The penalty doubles to 20%, plus compounding interest. And it's automatic. The CRA doesn't care why you were late.

5. T4 slips and the T4 Summary

Every February, you report the previous year's payroll to the CRA. Each employee gets a T4 slip. You file them electronically, along with a T4 Summary that totals everything up -- wages, deductions, pensionable and insurable earnings across all employees. Deadline: last day of February. February 28 in a regular year, 29 in a leap year.

The box codes that trigger the most reassessments

• Box 14 -- Employment income. Total taxable earnings for the year. Salary, wages, bonuses, vacation pay, commissions, and the cash value of any taxable benefits all go here.
• Box 16/17 -- CPP contributions. Employee CPP deducted. Getting Box 26 (pensionable earnings) wrong alongside Box 16 is one of the top reasons the CRA sends reassessment letters every spring.
• Box 18 -- EI premiums. Employee EI deducted. This has to tie to Box 24 (insurable earnings), which isn't always the same as Box 14. That mismatch trips people up.
• Box 22 -- Income tax deducted. Total federal and provincial tax withheld over the year. Straightforward, but errors here mean the employee's T1 won't balance.
• Box 26 -- CPP pensionable earnings. Not always equal to Box 14. If someone turned 18 or 70 during the year, or started or stopped CPP mid-year, this number gets pro-rated.
• Other info boxes (Code 30, 34, 40, etc.). Taxable benefits, company parking, auto allowance -- each reported separately but also added to Box 14. Miss one and the T4 doesn't add up.

Late T4 penalties start at $100 for 1-5 slips and go up from there. Box errors don't always trigger a fine, but they almost always trigger a letter from the CRA asking for corrections. And that usually means an amended T4 filing. For the ongoing filing side, see payroll services.

6. When do you file an ROE?

The Record of Employment (ROE) is what Service Canada uses to decide if your employee qualifies for EI. You need to file one any time an employee has an "interruption of earnings." That's the CRA's way of saying:

• Termination or dismissal
• Layoff -- temporary or permanent
• Resignation
• Maternity, parental, or caregiver leave
• Sickness or long-term disability
• Seven straight calendar days with no work and no insurable earnings

The five-day rule

If you file electronically through ROE Web (most employers do now), you've got five calendar days after the end of the pay period when the interruption happened. That's tight. Your payroll process needs to catch interruptions the same day -- not at the next pay cycle. Every week you're late delays the employee's EI claim and risks a follow-up from Service Canada.

Block 16 reason codes

Block 16 is the "why" -- a one- or two-letter code explaining the interruption. Code A means shortage of work or end of contract. Code D is illness. Code E is quit. Code F is maternity. Code M is dismissal.

Pick the wrong code and you'll hear about it. Service Canada uses this to decide the employee's EI eligibility. Entering "quit" when the situation looks more like a dismissal? That's one of the most common disputes we see.

7. Ontario-specific: WSIB and EHT

If you're in Ontario, two provincial programs run alongside your CRA payroll. Both are mandatory for most industries, but they kick in at different points and are managed by different agencies.

WSIB (Workplace Safety and Insurance Board)

WSIB covers workplace injuries and illness. Most Ontario industries have to register within ten days of hiring their first worker. Your premiums are based on an industry-specific rate (the "classification unit rate") applied to insurable earnings, which are capped annually. You pay monthly, quarterly, or annually depending on the size of your payroll.

Some industries are exempt or partially covered. Construction has its own mandatory-coverage rules that include independent operators, not just employees. It's worth checking your classification before the first pay run. WSIB audits regularly turn up under-reported earnings or the wrong rate group.

EHT (Employer Health Tax)

EHT is a provincial tax on your total Ontario payroll. Good news for most small businesses: eligible private-sector employers get a $1 million exemption. If your payroll stays under that, you owe nothing. Above it, rates are graduated up to 1.95%.

But there's a catch. If you run multiple corporations under common control, those are "associated employers" -- and they share one $1 million exemption across the whole group. Not one per company. EHT is filed annually with the Ontario Ministry of Finance. Larger employers pay in monthly or quarterly installments.

8. What counts as a taxable benefit?

A taxable benefit is anything non-cash that you give an employee that the CRA considers income. It gets added to Box 14 on their T4, which raises their taxable income and usually their CPP and income tax withholding too. This is one of the quieter payroll mistakes. It doesn't trigger a penalty right away. But it compounds every pay period until somebody catches it.

The ones that come up most

• Personal use of a company vehicle. This includes a standby charge (based on cost or lease value) and an operating benefit (cents per personal kilometre driven). You need a mileage log separating personal from business use. No log? The CRA assumes it's all personal.
• Employer-paid parking. Usually taxable. Exceptions exist if the employee has a qualifying disability, or if the lot is a shopping-centre or non-scramble lot you don't own.
• Group term life insurance. Premiums you pay are a taxable benefit to the employee. But extended health, dental, and short-term disability? Those are usually not taxable in Ontario.
• Gifts and rewards over the annual limit. Non-cash gifts are fine up to a combined annual limit per employee. Go over, and the excess is taxable. Cash or near-cash gifts like gift cards are always taxable. Always.
• Board and lodging. Employer-provided housing or meals have their own calculation rules.

One more thing. If you're a shareholder-employee of a CCPC, pay attention. A benefit you receive as a shareholder (not as an employee) is a "shareholder benefit" -- different tax treatment, and the corporation can't deduct it. For the corporate side of that question, see corporate tax filing.

9. The mistakes we see over and over

The same payroll mistakes come through our door every year. None are exotic. Most come from rushing, guessing, or trusting that the software caught everything.

Late or missed remittances

This is the big one. The automatic 10%-and-climbing penalty on late PD7A remittances is the most expensive avoidable cost in Canadian payroll. The fix isn't complicated -- it's calendar discipline. The CRA publishes due dates a year in advance. Every certified payroll software exports them. But people still miss them. Miss three in the same year and you're almost guaranteed a trust examination.

Employee vs contractor misclassification

Calling someone a contractor when they're really an employee? That can blow up years later. The CRA can reassess for unremitted CPP, EI, and income tax going back multiple years -- plus interest and penalties. Their test looks at control, tools, chance of profit, and integration. A written contract helps, but it doesn't override how the relationship actually works.

Missed ROEs

Every week past the five-day window delays the employee's EI claim and risks a Service Canada follow-up. Best practice: file the ROE the same day you process the final pay. Not later. The ones that get missed most? Maternity and sick leaves. There's no termination event, so people forget. But the trigger is seven days without insurable earnings -- not a departure letter.

Forgetting to remit on termination

Final pay, vacation payouts, and severance all generate source deductions. Those still have to be remitted on schedule. We see this a lot when employers close down or stop operations -- they forget the last PD7A and get a late-remittance assessment months later. And the RP account needs to be formally closed with the CRA. You can't just let it go silent.

Trust examinations

Source deductions are technically "trust funds" held for the Crown. When the CRA thinks you've collected deductions but haven't sent them in, they open a trust examination. It's narrower and faster than a full audit, but it carries personal liability for directors under Income Tax Act section 323. That means the CRA can come after the director personally -- not just the corporation. For how these files are handled once the CRA is already at the door, see CRA audit support.

10. Should you do payroll yourself, use a provider, or hand it off?

You've got three realistic options: run it yourself in software, subscribe to a dedicated payroll provider, or hand the whole thing to an accounting firm or bookkeeper. Each works. None is the right answer for everyone.

DIY with accounting software

• QuickBooks Online Payroll. Tied into QBO bookkeeping. Handles CPP/EI/tax, direct deposit, T4 year-end, and ROE generation. Good fit if you're already in QBO and want one vendor. Pricing scales with employee count.
• Xero Payroll (Canada). Available through integration partners. Less common than QBO in Ontario's small-business market, but it works.
• Wave Payroll. Canadian-built for smaller teams. Covers core pay runs, T4s, and ROEs. Popular with sole-owner corporations running payroll for one or two people.

Dedicated Canadian payroll providers

• Wagepoint. Canadian, small-business focused, clean interface. Transparent per-employee pricing. Handles remittances and T4s from start to finish.
• Payworks. Mid-market Canadian provider. Deeper HR features, time tracking, reporting. Common among employers with 20 to 200 employees.
• Ceridian Dayforce. Enterprise-grade. Built for larger employers with complex scheduling, union rules, or multi-province teams.
• ADP Canada. Global provider, Canadian compliance built in. Broadest feature set, highest price. Used from mid-market through enterprise.

The honest tradeoffs

DIY is cheaper and gives you direct control. But you're on the hook for every remittance, every T4 box, every ROE deadline. It works best for stable payrolls with few changes and an owner who's comfortable reading CRA guides.

Providers cost more but absorb most of the compliance work. They remit automatically, file T4s, and generate ROEs on demand. Best for payrolls with real complexity -- multiple pay rates, shift premiums, taxable benefits, multi-province employees.

Handing payroll to an accounting firm means someone's using one of these tools under the hood and adding a human review layer -- year-end reconciliation, integration with bookkeeping and tax, and catching what software can't. Wrong CPP pro-ration. Missing taxable benefits. An ROE code that's going to get disputed. The best choice depends on your complexity and how much compliance risk you're willing to carry.

11. What happens when payroll falls behind?

Payroll that's behind is its own category of problem. Usually the pattern looks like this: source deductions pile up unremitted while operations keep running, until a CRA letter or a cash crunch forces the issue. Catching up is harder than staying current because the arrears compound and the director's personal assets are on the line.

Unremitted source deductions

This is the part people don't realize. Deductions you've already withheld from employees but haven't sent to the CRA? That's not your money. It's trust funds. The CRA treats unremitted source deductions more seriously than unpaid corporate tax because your employees have already been credited with those amounts on their T4s and T1 filings. Interest and penalties compound. And past a certain threshold, the CRA can issue a requirement to pay against your receivables.

Director liability under s.323

Section 323 of the Income Tax Act makes corporate directors personally liable for unremitted source deductions. Not the corporation. The director. Personally. Resigning doesn't wipe the slate for amounts that built up during your time as director. The CRA has a two-year window from the date of resignation to assess you -- and that window is long enough that most disputes land inside it.

How catch-up usually works

The sequence is straightforward, even if the work isn't: rebuild missing pay registers from bank statements and prior T4 Summaries, recalculate what should have been remitted, file amended T4s and T4 Summaries for the affected years, and negotiate a payment arrangement with the CRA. If the books aren't in shape to file from, they need rebuilding first. For that, see catch-up bookkeeping.

12. How long do you keep payroll records?

Payroll records have the longest retention requirement in Canadian small-business bookkeeping. Six years. And the CRA expects them organized, readable, and available on request -- not buried in a filing cabinet you haven't opened since 2019.

• Six-year retention (CRA). Pay registers, T4s, T4 Summaries, PD7A confirmations, TD1 forms, ROEs, mileage logs, taxable benefit worksheets. Six years from the end of the tax year they relate to.
• Three-year retention (Ontario ESA). Hours of work and wage records under the Employment Standards Act. But honestly, just apply the six-year CRA rule to everything.
• Employee files. Hire letter or contract, federal and provincial TD1s, SIN on file (don't store the SIN longer than you need to), bank direct-deposit form, plus a record of any wage or role changes.
• Electronic records work fine. Cloud payroll, cloud bookkeeping -- both satisfy the CRA as long as the records are complete, readable, and backed by source documents.
• Corporate minutes. If you change a shareholder's salary, that should show up in the minute book too. The CRA wants the records to match.

Payroll records don't live in isolation. The pay register has to reconcile to the GL. PD7A payments have to match bank activity. Taxable benefits have to match the T4 boxes. For how payroll data gets reconciled into your books each month, see bookkeeping services.