The Canadian Small Business Payroll Handbook
- Targeted Accounting
- Payroll
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Table of Contents
Before Your First Employee
Payroll is the area where the gap between “seems manageable” and “actually manageable” is widest. The calculations are arithmetic. The obligations around them are not.
You need a payroll program account — your business number with an RP suffix — before the first pay date, not after. It can be added to an existing BN online in minutes, or opened alongside a new BN. Register too late and your first remittance is already overdue.
You also need to know, before you hire, which province the employee works in. Provincial income tax rates, TD1 forms, statutory holiday rules, minimum standards and workers’ compensation registration all follow the employee’s province of employment, not your head office. A Manitoba company with a remote employee in BC has BC obligations.
Finally, budget for the employer cost, which is meaningfully more than the salary. On top of gross pay you carry the employer half of CPP, 1.4 times the employee’s EI, workers’ compensation premiums, any provincial payroll tax that applies at your size, plus vacation pay accrual. As a planning rule, an employee costs roughly 1.12 to 1.18 times their gross salary before benefits.
Key Takeaways
- Payroll deductions are held in trust. Unremitted source deductions can be collected from directors personally, even after a corporation is dissolved.
- For 2026: CPP is 5.95% to a $74,600 ceiling, CPP2 is 4% from $74,600 to $85,000, and EI is 1.63% to $68,900.
- Employers match CPP dollar for dollar and pay EI at 1.4× the employee rate.
- Your remittance frequency is driven by your average monthly withholding amount, and it changes as you grow.
- Misclassifying an employee as a contractor is the most expensive payroll error in Canada — the employer absorbs both halves plus penalties and interest.
Employee or Contractor?
This decision is not yours to make by preference, and writing “independent contractor” in an agreement does not settle it. The CRA looks at the substance of the relationship, and so do provincial employment standards boards and workers’ compensation authorities — sometimes reaching different conclusions from each other.
The central question is control: who decides what work is done, when, where and how. Around it sit several supporting tests — who provides the tools and equipment, whether the worker can subcontract or hire helpers, whether they carry genuine financial risk and opportunity for profit, and how integrated they are into your operations.
A worker who uses your equipment, works hours you set, takes direction on method, has no other clients, and cannot send a substitute is an employee in all but name, regardless of what the invoice says. The same factors decide whether an incorporated contractor is caught by the personal services business rules for consultants.
Why misclassification is the expensive one
If the CRA reclassifies a contractor as an employee, the employer is generally assessed for both the employee and employer portions of CPP and EI that should have been withheld, plus penalties and interest, typically across every open year of the relationship. The worker is usually made whole; the employer absorbs it. On a single long-term contractor this routinely reaches five figures. If you are genuinely unsure, a CPP/EI ruling request from the CRA costs nothing and settles the question in advance.
The TD1 and What It Sets Up
Every new employee completes two TD1 forms — federal and provincial — on or before their first day. These declare the personal tax credits that determine how much income tax you withhold. An employee who doesn’t submit one is defaulted to the basic personal amount only, which usually means over-withholding.
TD1s are not a one-time formality. Employees should submit a new one whenever their circumstances change — a spouse becoming dependent, tuition credits, a second job. An employee with two jobs must claim credits on only one TD1; claiming the basic amount twice leads to a balance owing in April and an unhappy conversation.
Keep the completed forms on file. You don’t send them to the CRA, but you must be able to produce them.
The Three Deductions
From every pay you withhold Canada Pension Plan contributions, Employment Insurance premiums and income tax, then add the employer’s own share and send the total to the CRA.
| 2026 | Rate | Applies to | Employee max | Employer |
|---|---|---|---|---|
| CPP | 5.95% | Earnings above the $3,500 exemption up to $74,600 (YMPE) | $4,230.45 | Matches 1:1 |
| CPP2 | 4.00% | Earnings from $74,600 to $85,000 (YAMPE) | $416.00 | Matches 1:1 |
| EI | 1.63% | Insurable earnings up to $68,900 | $1,123.07 | 1.4× employee |
| Income tax | Graduated | Taxable income, per TD1 claims | — | None |
Quebec operates its own parallel system — QPP instead of CPP, a reduced federal EI rate alongside QPIP, and separate provincial remittances to Revenu Québec. If you employ anyone in Quebec, treat it as a distinct payroll regime rather than a variation.
CPP2, introduced in 2024, is the part owners most often miss because it only affects higher earners and doesn’t appear on lower-paid staff. It is a second tier of contributions on the band of earnings above the regular ceiling, at a different rate, and it is reported separately on the T4.
Some earnings are pensionable but not insurable, or vice versa. The clearest example: an employee who controls more than 40% of the corporation’s voting shares is generally not EI-insurable, so no EI is withheld or paid — a detail that matters for owner-managers deciding between salary and dividends, and one that also means no EI benefits are available to them.
Remittance Schedules
How often you remit depends on your average monthly withholding amount (AMWA) — the total of CPP, EI and tax you remitted, averaged monthly, generally looking back two calendar years.
| AMWA | Remitter type | Due |
|---|---|---|
| Under $25,000 | Regular | 15th of the month following the pay |
| $25,000 to $99,999.99 | Accelerated — Threshold 1 | Twice monthly |
| $100,000 and over | Accelerated — Threshold 2 | Up to four times monthly, within three working days |
| Under $3,000 with a clean compliance record | Quarterly (on CRA approval) | 15th of the month after each quarter |
The CRA notifies you when your threshold changes, but the obligation is yours regardless of whether the letter arrives. Growing businesses cross into Threshold 1 without noticing and start accruing penalties on remittances that were previously fine. Remittance dates sit alongside every other obligation in our Canadian business tax filing calendar.
Taxable Benefits
A taxable benefit is anything of value you give an employee beyond salary. It is added to their income, appears on the T4, and is generally subject to CPP and often EI and income tax withholding — which means it affects your remittance, not just their return.
Commonly missed items include personal use of a company vehicle, group life insurance premiums you pay, gym memberships, most gift cards regardless of amount, employer-paid parking where it isn’t a business necessity, and cash or near-cash gifts of any size.
Equally worth knowing: some things are not taxable. Non-cash gifts and awards up to a modest annual total, reasonable per-kilometre vehicle allowances, employer contributions to a registered pension plan, and private health services plan premiums in most provinces all sit outside employment income.
Automobile benefits deserve their own treatment. A company-provided vehicle generates both a standby charge, based on the cost or lease of the vehicle and availability, and an operating expense benefit for personal-use costs you pay. Both require a kilometre log distinguishing business from personal travel. Without a log the CRA will assume the least favourable split.
Records of Employment
An ROE is required whenever an employee has an interruption of earnings — termination, resignation, layoff, and also unpaid leaves such as parental or medical leave. It is how Service Canada determines EI eligibility, and it is not optional even when the employee says they don’t need it.
Filing electronically, the deadline is five calendar days after the end of the pay period in which the interruption occurred. Paper ROEs run on a different and shorter clock. Electronic filing is faster, better documented, and avoids the serial-number handling that paper requires.
The most common source of trouble is not lateness but accuracy — insurable hours and earnings that don’t reconcile to the payroll records, or a reason code that doesn’t match the circumstances. Both invite scrutiny, and an incorrect reason code can affect the former employee’s benefits.
Year End and T4s
T4 slips and the T4 Summary are due by the last day of February for the preceding calendar year, filed with the CRA and distributed to employees by the same date.
Before you file, reconcile. The total of boxes 14 (employment income), 16/17 (CPP), 18 (EI) and 22 (tax deducted) across all slips must agree with what you actually remitted during the year. A discrepancy is the single most reliable trigger for a pensionable and insurable earnings review (PIER), and the CRA will assess the shortfall — including the employee portion you failed to withhold.
Run this reconciliation in December, not February. A gap found in December can often be corrected in the final pay run of the year; the same gap found in February becomes an amendment and an assessment.
Not every payment belongs on a T4. Subcontractors, certain pension and retirement payments, and some fees for services go on a T4A. Construction businesses paying subcontractors may instead owe T5018 slips, on a reporting period tied to their fiscal year rather than the calendar year.
Penalties Worth Avoiding
Late remittance penalties are charged on the amount, not as a flat fee, and they escalate quickly: 3% for one to three days late, 5% for four to five, 7% for six to seven, and 10% beyond seven days or where no amount is remitted at all. A repeat failure in the same year, where the CRA considers it made knowingly or through gross negligence, carries 20%.
The more serious exposure is director liability. Source deductions are trust funds. Where a corporation fails to remit, directors can be held personally liable for the amounts plus interest and penalties, and that liability survives the corporation. It is one of the few places where the corporate veil offers no protection, and it is why payroll remittances should be the last obligation a struggling business defers, not the first.
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