Vacation Pay in Canada: Rates by Province, Accrual and Payout
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Table of Contents
Two Separate Entitlements
Every employee in Canada is entitled to two things: vacation time, which is time off work, and vacation pay, which is money calculated as a percentage of what they earned. They are related but legally separate. Paying an employee 4% on every cheque does not remove their right to take two weeks off, and giving someone time off does not satisfy the pay requirement unless the pay goes with it.
The rules come from provincial employment standards, or the Canada Labour Code for federally regulated businesses such as banks, airlines and telecoms. The minimums are similar everywhere, but the details differ enough to cause problems. This guide covers the rates, how to calculate vacation pay, the ways to pay it, termination and the bookkeeping. It is part of our guide to how to do payroll in Canada.
Key Takeaways
- The usual minimum is two weeks and 4% of gross wages, rising to three weeks and 6% after a set number of years. In Ontario that is five years.
- Vacation pay is calculated on most earnings, including overtime, commissions and holiday pay, but not on discretionary bonuses, tips or expense allowances.
- You can pay it when the vacation is taken or with each pay. Paying with each pay usually requires the employee’s written agreement and a separate line on the pay stub.
- All accrued vacation pay must be paid out when employment ends, and it goes on the Record of Employment.
- Accrued but unpaid vacation pay is a liability on your balance sheet.
Vacation Pay Rates by Province
These are the statutory minimums. Your employment contracts or policies can give more, never less.
| Jurisdiction | Starting entitlement | Increased entitlement |
|---|---|---|
| Ontario | 2 weeks, 4% | 3 weeks, 6% after 5 years |
| British Columbia | 2 weeks, 4% after 1 year | 3 weeks, 6% after 5 years |
| Alberta | 2 weeks, 4% after 1 year | 3 weeks, 6% after 5 years |
| Manitoba | 2 weeks, 4% after 1 year | 3 weeks, 6% after 5 years |
| Saskatchewan | 3 weeks, 3/52 of wages, after 1 year | 4 weeks, 4/52 of wages, after 10 years |
| Quebec | 2 weeks, 4% after 1 year | 3 weeks, 6% after 3 years |
| Federally regulated (Canada Labour Code) | 2 weeks, 4% after 1 year | 3 weeks, 6% after 5 years; 4 weeks, 8% after 10 years |
The Atlantic provinces and the territories start at the same two weeks and 4%, but require longer service, often eight years or more, before the higher tier applies. Check the current rules for your province before relying on a table, including this one. Ontario’s are set out in the province’s guide to the Employment Standards Act and the federal rules on Canada.ca.
Vacation pay applies to part-time, casual and seasonal staff at the same percentages. An employee who works two days a week still earns 4% on every dollar.
Which Earnings Count
Vacation pay is a percentage of the employee’s gross wages for the vacation entitlement year. In Ontario, gross wages include:
- regular wages and salary
- overtime pay
- public holiday pay
- commissions and non-discretionary bonuses, meaning bonuses tied to hours, production or efficiency
- termination pay
They exclude tips and gratuities, discretionary bonuses that are not tied to performance measures, expense and travel allowances, employer contributions to benefit plans, severance pay and vacation pay itself.
Other provinces use similar definitions with small differences, usually around bonuses and commissions. Your payroll software applies a single rule to every pay type, so set up each earning code correctly once. A commission code that is set to “not vacationable” will quietly underpay every commissioned employee for years.
How to Calculate Vacation Pay
Multiply the eligible earnings by the percentage. An Ontario employee earning $26 an hour who works 1,950 hours in the year earns $50,700. At 4%, her vacation pay is $2,028. Add $1,300 of overtime and $624 of public holiday pay and the eligible earnings become $52,624, so her vacation pay rises to $2,104.96.
For salaried employees, the usual practice is to continue their regular salary while they are on vacation. That satisfies the pay requirement as long as the amount is at least the statutory percentage of their eligible earnings. If a salaried employee earns large commissions or bonuses, the percentage method can give a higher figure, and the employer must pay the difference.
When an employee crosses into the higher tier, for example their fifth anniversary in Ontario, the 6% rate applies to the entitlement year that follows. Mark the date in your payroll system, because it rarely updates itself.
Ways to Pay Vacation Pay
There are three common approaches.
Accrue and pay when vacation is taken. The 4% or 6% builds up in a vacation bank, and the employee draws it as pay while they are off. This is the default and the easiest to explain. It also means a growing liability on your books if staff do not take their time off.
Pay with every cheque. The vacation pay is added to each pay and shown as a separate line on the pay stub. The employee then takes unpaid time off for their vacation. In Ontario this requires the employee’s written agreement. It is common for part-time, casual and hourly staff with irregular schedules, and it eliminates the accrued liability, but employees sometimes find they have no money set aside when they take their time off.
Lump sum before the vacation. The full balance is paid before the employee leaves for vacation. It is less common now that most pay is by direct deposit.
Whichever you choose, apply it consistently, document it in the employment agreement or a written policy, and make sure the pay stub shows vacation pay separately from wages.
Taking the Time Off
Employers generally schedule vacation, but they must make sure it is actually taken. In Ontario, vacation must be taken within 10 months after the end of the year in which it was earned. An employee can agree in writing to give up a year’s vacation time, but only with the approval of Ontario’s Director of Employment Standards, and never the vacation pay.
Carry-over policies, use-it-or-lose-it rules and paying out unused time instead of granting it all sit on top of these minimums. A policy that would leave an employee below the statutory entitlement is not enforceable. If you are unsure, get the policy reviewed before relying on it.
Vacation Pay When Employment Ends
When an employee leaves for any reason, you must pay out all vacation pay earned but not yet paid, including the part year in progress. In Ontario it is due within seven days of the end of employment, or on the next regular pay day if that is later.
The payout goes on the employee’s Record of Employment as vacation pay paid or payable because of the separation. Our guide to the Record of Employment explains how it affects the EI claim.
Vacation pay is taxable, pensionable and insurable like ordinary wages, so withhold income tax, CPP and EI on the payout and include it in your next payroll remittance.
Recording Vacation Pay in Your Books
If you accrue vacation pay, record the cost as it is earned, not when it is paid. Each pay period, debit vacation pay expense and credit a vacation pay payable liability for the 4% or 6% earned. When the employee takes vacation, the payment reduces the liability rather than hitting the profit and loss again.
At year end, the liability should equal the vacation pay owed to every employee, and it should reconcile to the vacation balances in your payroll system. A balance that only ever grows usually means vacation is being paid but not relieved from the liability, which overstates your expenses. Our guide to bookkeeping basics explains how liabilities like this appear on the balance sheet.
Not Sure Your Vacation Pay Is Set Up Correctly?
We review your earning codes, vacation tiers and accrual balances, fix anything that is under- or over-paying, and reconcile the liability in your books. It is usually a short project with a long-lasting payoff.
