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Dual Tax Reporting, Labor Laws Mark Canadian Complexity

May 12, 2022, 12:32 AM

Much of the complexity of Canadian payroll comes from the 13 jurisdictions’ differing labor laws as well as tax reporting to multiple agencies, a member of Canada’s payroll association said May 10.

While most tax reporting is only done at the federal level through the Canada Revenue Agency, Quebec has a separate tax system administered by Revenu Quebec, Steven Van Alstine, vice president of education at the National Payroll Institute, said. The NPI changed its name from the Canadian Payroll Association in March.

The Canada Revenue Agency collects federal income tax, provincial income tax for all jurisdictions except Quebec, and Canadian Pension Plan and Employment Insurance contributions, while Revenu Quebec collects Quebec income tax, Quebec Pension Plan contributions, and other payroll taxes imposed by the province, Van Alstine said. Provincial income taxes remitted to the CRA are calculated separately from federal tax but are remitted together, he said.

“I always say having a Quebec payroll is like having two payrolls, because you really have to do everything for both agencies,” Van Alstine said, speaking at the American Payroll Association’s 40th Payroll Congress in Las Vegas.

New Employee Requirements

The employer requires similar information from new employees for both the CRA and RQ, including Form TD1, Personal Tax Credits Return, which is used to calculate withholding, and its English equivalent for Quebec, Form TP-1015.3-V, Source Deductions Return, Van Alstine said. Quebec uses the "-V” suffix for form names to designate English versions, he said.

All new employees must fill out Form TD1, and Form TP-1015.3-V if necessary, but new forms are filled out only if an employee’s circumstances require a change, Van Alstine said.

Van Alstine encouraged employers to remind employees at the end of each year to make any necessary changes to Form TD1, and also to communicate possible changes in employees’ pay, such as the restarting of social taxes after an employee hit the taxable limit in the previous year.

New employees must provide a Social Insurance Number. Numbers that start with 9 are given to holders of work permits and have expiration dates, Van Alstine said.

Statutory Deductions, Income Tax

The Canadian Pension Plan and Quebec Pension Plan both cover employees over age 18, and the CPP stops requiring contributions at age 70, while employees over age 65 can opt out, Van Alstine said.

Other Quebec statutory deductions include the Quebec Parental Insurance Plan, which provides benefits for maternity, paternity, and adoption leave, Van Alstine said.

The Employment Insurance rate also differs for employees and employers in Quebec, and since EI comes with an annual exemption for taxable wages that should be applied equally per pay period, employers should ensure at year end that they have not over-exempted any employees, Van Alstine said.

Employers can also apply to reduce their EI contribution rate if they provide replacement benefits to employees, Van Alstine said.

Some provinces have provincial payroll taxes assessed on payroll in the province, mostly focused toward funding health insurance or postsecondary education, while Quebec has multiple additional taxes, including the Quebec Health Services Fund, the Contribution Related to Labour Standards, and a workforce skills development fund contribution, Van Alstine said. The taxes are collected by each province, he said.

In particular, the employer’s total global payroll is used to determine which rate applies for the Quebec Health Services Fund tax, but the tax is only assessed on Quebec payroll, Van Alstine said.

Taxable income for income tax is defined in the federal Income Tax Act and Quebec Income Tax Act, Van Alstine said.

Some deductions from taxable income include contributions to registered pension plans or registered retirement savings plans, union dues, amounts for living in prescribed zones, generally in the north of Canada, and other waivers that may be granted by either tax agency, Van Alstine said.

Withholding for bonuses, including off-cycle, irregular, and nonperiodic payments, is calculated differently than withholding for normal wages, Van Alstine said. Withholding for lump-sum payments where there is no employee-employer relationship, such as pension payments, is calculated using separate tax rates for Quebec and the rest of Canada, he said.

Record of Employment, Labor Laws

Employers are required to track employees’ hours worked through a Record of Employment (ROE) to verify eligibility for EI benefits, Van Alstine said.

Efforts to introduce a real-time payroll reporting system in Canada, like that in the U.K. and Australia, were accelerated by the Covid-19 pandemic and associated overpayments of EI benefits, Van Alstine said. If a real-time system is introduced, ROEs would no longer be needed, and year-end wage statements, which are the CRA’s T4 slips, Statement of Remuneration Paid, and Quebec’s equivalent, the RL-1 slip, Employment and Other Income, would also not be needed, he said.

Most employers are covered by provincial or territorial labor laws instead of the Canada Labour Code, which applies to federally regulated businesses, Van Alstine said. Among other areas, provincial and territorial labor laws specify minimum wages, rules on hours of work and overtime, public holidays, annual leave and other kinds of leave, and severance pay requirements.

One practice to counter the variations in labor laws is that some employers apply the most generous policy in effect in any jurisdiction to all jurisdictions, Van Alstine said.

Each jurisdiction has variations in public holidays, though “commonly provinces have about 10 statutory holidays,” Van Alstine said. Required types of leave also vary by jurisdiction, he said.

Principles of labor laws are similar to those in the U.S., but “there’s a perception that we’re very much more generous,” Van Alstine said.

To contact the reporter on this story: Jamie Rathjen in Las Vegas at jrathjen@bloombergindustry.com
To contact the editor on this story: William Dunn at wdunn@bloombergindustry.com