A Beginner’s Guide to Payroll Compliance for Canadian Employers (2026 Update)

Executive Summary

Payroll is one of the most legally complex and audit-heavy functions in Canadian business. Get it right, and your employees are paid on time, you avoid penalties, and you build trust. Get it wrong, and you face steep CRA penalties, retroactive tax assessments, and potential personal liability.

The Canadian payroll landscape is uniquely complicated because there’s no single set of national payroll rules. Instead, employers navigate a complex web of federal regulations (for banks, telecom, transportation companies), provincial employment standards (which cover 90% of Canadian workers), and unique remittance obligations that vary by jurisdiction, payroll size, and business structure.

This comprehensive guide walks through the essential payroll compliance requirements for Canadian employers in 2026, with specific focus on the three most critical compliance areas: CPP and EI deductions (the biggest source of errors), remittance deadlines and penalties (the most expensive mistakes), and T4 filing (the most visible compliance requirement).

Whether you’re a startup with your first employee, an established SMB managing a team, or a growing company scaling payroll, this guide provides the practical knowledge needed to stay compliant and avoid costly mistakes.

Part 1: The Canadian Payroll Landscape—Why It’s Different

Federal vs. Provincial: Understanding Jurisdiction

The most important concept for Canadian payroll compliance is that payroll rules are not national—they’re jurisdictional. Your obligations depend on whether your employees work in industries under federal regulation or provincial regulation.

Federally Regulated Employers (approximately 10% of Canadian workers):

• Governed by the Canada Labour Code
• Include: Banks, telecommunications, interprovincial transportation, airlines, some media
• Fall under federal minimum wage ($17.75/hour) and federal employment standards
• File with federal CRA for remittances

Provincially Regulated Employers (approximately 90% of Canadian workers):

• Governed by provincial/territorial employment standards acts
• Include: Retail, manufacturing, construction, professional services, hospitality, most small businesses
• Fall under provincial minimum wage (ranges $15.80–$17.94) and provincial employment standards
• File with provincial CRA for remittances

Practical implication: A business with employees in multiple provinces must comply with the rules of each province. Ontario overtime rules differ from BC rules. Alberta vacation pay differs from Quebec. This is why multi-provincial payroll is complex—you’re essentially running multiple payroll systems within one organization.

The CPP and EI Complication: Federal Programs with Provincial Variations

Canada Pension Plan (CPP) and Employment Insurance (EI) are federal social insurance programs, but rates and thresholds change annually, and some provinces (primarily Quebec) have variations.

CPP (Canada Pension Plan): Retirement pension fund that employees and employers contribute to. In 2025, both employees and employers each contribute 5.95% of earnings between $3,500 and $71,300 (the Year’s Maximum Pensionable Earnings, or YMPE). Additionally, CPP2 (a new enhancement tier introduced in 2024) applies 4.00% on earnings between $71,300 and $81,200.

EI (Employment Insurance): Income replacement during unemployment, parental leave, sickness, and other covered circumstances. In 2025, employees contribute 1.66% (outside Quebec) and employers contribute 1.4 times the employee amount (2.324%) on earnings up to $65,700 (Maximum Insurable Earnings, or MIE). Quebec has its own provincial parental insurance plan with different rates.

The complication: These rates and thresholds change every January. In 2025 alone, the CPP maximum contribution increased, EI rates shifted, and provinces adjusted minimum wages. For employers, staying compliant means recalculating remittance formulas at least annually.

Part 2: The 10 Essential Payroll Compliance Requirements for Canadian Employers

1. Register with the Canada Revenue Agency (CRA) for a Payroll Account

Before you hire your first employee, you must register with the CRA. This is non-negotiable and establishes your legal authority to deduct and remit payroll taxes on behalf of your employees.

What you need to do:

1. Register for a Business Number (BN) if you don’t already have one
2. Apply for a Payroll Account (also called a payroll remitter account)
3. Complete Form PD7A (Application for a Payroll Deductions Account)

Why it matters:

• The CRA uses your payroll account to track all deductions and remittances
• It determines your remitter category (affecting how often you remit)
• Operating payroll without a registered account is illegal and can result in personal liability for director/owner if you fail to remit

Timeline: Registration can take 2-3 weeks, so plan ahead before your first employee starts.

2. Calculate CPP Deductions Correctly (2025 Rates and Formula)

CPP deductions are the most commonly miscalculated payroll element. Small errors compound monthly and can result in audit adjustments and interest charges.

2025 CPP Parameters:

• Employee contribution rate: 5.95%
• Employer contribution rate: 5.95% (same as employee)
• Self-employed rate: 11.9% (covers both portions)
• Basic exemption: $3,500 (unchanged from prior years)
• Year’s Maximum Pensionable Earnings (YMPE): $71,300
• Maximum employee/employer contribution: $4,034.10 each
• CPP2 (enhancement): 4.00% on earnings $71,300–$81,200
• Maximum CPP2 contribution: $396 per employee/employer

How to calculate CPP step-by-step:

Step 1: Determine pensionable earnings for the pay period

• Pensionable earnings = Gross salary + taxable benefits (excludes some benefits)
• Example: Employee earning $5,000/month = $5,000 pensionable earnings

Step 2: Calculate basic exemption per pay period

• Annual exemption = $3,500
• Divide by number of pay periods: $3,500 ÷ 12 (monthly) = $291.67/month
• Biweekly: $3,500 ÷ 26 = $134.62

Step 3: Calculate pensionable earnings after exemption

• Pensionable earnings after exemption = $5,000 – $291.67 = $4,708.33

Step 4: Apply the CPP rate

• Employee CPP = $4,708.33 × 5.95% = $280.15
• Employer CPP (match) = $280.15
• Total CPP for this employee this pay period = $560.30

Step 5: Stop deducting at maximum

• Once an employee has contributed the annual maximum ($4,034.10 for regular CPP + $396 for CPP2 = $4,430.10), stop deducting for the rest of the year
• The CRA tracks this—if you over-deduct, you must issue a refund

CPP2 (Enhancement Tier):

• Applies to earnings between $71,300 and $81,200
• Rate: 4.00%
• Calculated separately from regular CPP
• Maximum contribution: $396 per employee/employer
• Deduct until employee reaches $81,200 in annual earnings

Common errors:

• Forgetting the basic exemption ($3,500)
• Not stopping at the annual maximum
• Including non-pensionable benefits or bonuses incorrectly
• Not tracking CPP2 separately

3. Calculate EI Deductions Correctly (2025 Rates)

Employment Insurance provides income replacement when employees are unemployed, on parental leave, sick leave, or in other covered circumstances.

2025 EI Parameters (Outside Quebec):

• Employee contribution rate: 1.66%
• Employer contribution rate: 2.32% (1.4× the employee rate)
• Maximum Insurable Earnings (MIE): $65,700
• Maximum employee premium: $1,077.48
• Maximum employer premium: $1,508.47

Note: Quebec has its own provincial parental insurance plan (PPIP) with different rates and thresholds. If you employ Quebecers, verify Quebec-specific rates.

How to calculate EI step-by-step:

Step 1: Determine insurable earnings

• Insurable earnings = Gross salary (up to maximum MIE of $65,700)
• Example: Employee earning $5,000/month = $5,000 insurable earnings

Step 2: Apply the EI rate

• Employee EI = $5,000 × 1.66% = $83.00
• Employer EI = $5,000 × 2.32% = $116.00
• Total EI for this pay period = $199.00

Step 3: Stop deducting at maximum

• Once employee has contributed the annual maximum ($1,077.48), stop deducting for the rest of the year
• The CRA tracks this; over-deductions must be refunded

Key differences from CPP:

• EI has NO exemption threshold (unlike CPP’s $3,500)
• EI has a lower ceiling ($65,700) than CPP ($71,300)
• EI applies to gross earnings, no benefit adjustments
• Employer contribution is higher (1.4×) than employee

4. Meet Payroll Remittance Deadlines (2025 Remitter Categories)

Missing remittance deadlines is one of the most expensive payroll mistakes. The CRA imposes escalating penalties starting at 3% for being a few days late.

Remitter Categories (determined by your Average Monthly Withholding Amount, or AMWA):

Quarterly Remitters (AMWA under $3,000):

• Due dates: April 15, July 15, October 15, January 15
• Covers: Q1 (Jan-Mar), Q2 (Apr-Jun), Q3 (Jul-Sep), Q4 (Oct-Dec)
• Typical: Very small payrolls (1-2 employees)
• Deadline: 15th day of month following the quarter

Monthly Remitters (AMWA $3,000–$24,999):

• Due date: 15th of the following month
• Covers: Each calendar month
• Example: January payroll due by February 15
• Typical: Most small-to-medium businesses
• Deadline: You have until the 15th of the next month

Accelerated Remitters – Threshold 1 (AMWA $25,000–$99,999):

• Remit twice per month
• If payday is 1st–15th of month: Remit by the 25th of same month
• If payday is 16th–31st of month: Remit by 10th of next month
• Typical: Growing businesses with larger payrolls

Accelerated Remitters – Threshold 2 (AMWA $100,000+):

• Remit up to 4 times per month
• Periods: 1st–7th, 8th–14th, 15th–21st, 22nd–end of month
• Due dates: 3rd working day after each period ends
• Typical: Large corporations with significant payroll

Finding your remitter category:

• The CRA determines your category based on your payroll history
• When you register as a new employer, you’ll likely start as monthly remitter
• Your remitter category changes automatically as your AMWA (average monthly withholding amount) changes
• You can check your status on My Business Account

5. Understand the Penalty Structure for Late Remittances

Missing remittance deadlines triggers automatic escalating penalties, regardless of whether you had intention to pay.

Penalty Schedule:

• 1–3 days late: 3% penalty on amount owed
• 4–5 days late: 5% penalty on amount owed
• 6–7 days late: 7% penalty on amount owed
• More than 7 days late: 10% penalty on amount owed
• Repeat late remittance in same calendar year: Additional 20% penalty
• Interest: Daily interest accrues on total amount owed (including penalties) at Bank of Canada rate + 4%

Example:
You owe $15,000 in payroll deductions for January and remit on January 25 (10 days late):

• Penalty: $15,000 × 10% = $1,500
• Interest: $15,000 × (4% + BoC rate) ÷ 365 × 10 days ≈ $164
• Total cost: $1,664 for being 10 days late

If you repeat a late remittance later in the year:

• You now face an additional 20% penalty on top of the 10%
• Total penalty: 30% on the second late remittance

This is why remittance deadlines are the most expensive payroll mistakes. Missing a deadline can cost tens of thousands of dollars in penalties and interest, even for modest payrolls.

6. File T4s by the Deadline (February 28/March 31, 2025)

The T4 slip is your employee’s record of all compensation paid and deductions withheld during the calendar year. Filing T4s is a mandatory year-end compliance requirement.

T4 Filing Requirements:

Who requires a T4:

• Any employee paid more than $500 in a calendar year
• Any employee from whom you deducted CPP, EI, or income tax
• All current, former, and terminated employees

What to report on the T4:

• Salary and wages
• Tips and gratuities
• Bonuses and commissions
• Vacation pay paid
• Taxable benefits and allowances
• Retiring allowances
• Any other employment income
• All deductions withheld (income tax, CPP, EI)

Key T4 rules for 2025:

Deadline: T4s must be issued to employees by the last business day of February (extended to March 31, 2025 due to CRA system challenges)

Provincial T4s: You must create a separate T4 for each province/territory in which the employee earned income. An employee who worked in Ontario for 10 months and BC for 2 months requires separate T4 slips

Nil remittances: Even if you have no deductions to remit in a period, you must still file a nil remittance with the CRA

Amended T4s: If you discover errors on already-filed T4s, you can amend them through the CRA

Late filing penalty: If you miss the February 28/March 31 deadline, you face penalties starting at 2.5% of the amount unreported

7. Comply with Minimum Wage and Overtime Requirements

Minimum wage and overtime vary dramatically by province. Employers must follow the rules in the province where work is performed, not where the company is headquartered.

Federal Minimum Wage (Federally Regulated Industries):

• $17.75/hour as of 2025
• Applies to: Banks, telecommunications, interprovincial transportation, airlines

Provincial Minimum Wages (2025):

• BC: $17.85/hour
• Alberta: Varies by classification
• Saskatchewan: $15.45/hour
• Manitoba: $15.80/hour (increasing to $16.00 October 1, 2025)
• Ontario: Varies by municipality
• Quebec: $16.10/hour
• Yukon: $17.94/hour
• Other provinces: $15.80–$17.85/hour range

Overtime Requirements (Vary by Province):

Federal: 1.5× regular rate for hours over 8/day or 40/week

BC: 1.5× for hours 8–12 in a day; 2× for hours 12+ in a day

Ontario: 1.5× for hours over 44 in a week

Alberta: 1.5× for hours over 8/day

Manitoba: 1.5× for hours over 8/day or 40/week (but not both)

Quebec: 1.5× for hours over 40/week

Overtime Banking: Some provinces allow employees to bank overtime hours (receive paid time off instead of overtime pay) with a written agreement. Other provinces prohibit this entirely.

Practical compliance:

• Audit your payroll software to ensure it correctly calculates overtime per province
• If you’re multi-provincial, ensure the system can apply different rules by location
• Document overtime policies clearly for employees
• Ensure you’re paying at least the minimum wage applicable in the province where work occurs

8. Provide Minimum Vacation Pay (Varies by Province)

Vacation pay is often misunderstood because requirements vary significantly by province. Some provinces include overtime in the calculation; others don’t.

Ontario (2025):

• Employees with <5 years tenure: 4% of gross wages
• Employees with 5+ years tenure: 6% of gross wages
• Includes overtime in calculation
• Can be paid out weekly (4-6% of weekly pay) or as banked vacation days

BC:

• Employees with <5 years tenure: 2% of gross wages
• Employees with 5+ years tenure: 6% of gross wages
• Includes overtime in gross wage calculation
• Can be taken or paid out based on employer policy

Alberta:

• 2 weeks per year after first year of employment
• Does NOT include overtime in calculation
• Must provide notice of vacation timing
• Cannot force unpaid vacation

Quebec:

• 1 week (1 day per week of work) per year
• Paid at regular hourly rate
• Includes overtime in calculation

Manitoba:

• 2 weeks after continuous employment
• Does NOT include overtime
• Paid as a lump sum or taken as time off

Key rule: When calculating vacation pay, understand whether overtime is included in your province. Failure to include overtime in provinces that require it is a common and expensive payroll error.

9. Keep Records for 6 Years (Canadian Requirement)

Canadian employment and tax law requires much longer record retention than the US (which is typically 3-4 years).

What records to keep for 6 years:

• Hours worked by each employee
• Gross pay paid each pay period
• Deductions withheld (CPP, EI, income tax)
• Remittances made to CRA
• Vacation pay accrued and taken
• All pay stubs issued
• Employment contracts and agreements
• Correspondence with CRA

Why 6 years:

• CRA audit period is generally 6 years from assessment date
• This gives the CRA time to review and reassess payroll
• If you can’t produce records, the CRA can estimate amounts owed, often unfavorably

Digital record retention:

• Modern payroll software automatically maintains records
• Ensure you have backups (ideally in cloud storage)
• Make sure records are searchable and accessible if audited

10. Stay Updated on 2025–2026 Compliance Changes

Payroll compliance changes every year, sometimes multiple times per year. Staying informed prevents costly surprises.

Recent & Upcoming Changes:

Pay Transparency (BC & Ontario):

• BC: Pay Transparency Act now requires salary ranges in job postings
• Ontario: Effective January 1, 2026—employers must include salary ranges in all job postings

Temporary Foreign Worker Program (TFWP):

• New wage thresholds effective June 27, 2025
• Affects employers using TFWP stream

Contractor vs. Employee Classification:

• CRA intensifying focus on misclassification
• Misclassified workers result in back taxes, penalties, interest, and potential liability

Federal Labour Code Updates:

• Sick leave entitlements updated
• Supply-chain transparency reporting requirements (Bill C-58, June 20, 2025)

Minimum Wage Adjustments:

• Most provinces adjust January 1 each year
• Some mid-year (e.g., Manitoba October 1)

CPP/EI Rate Changes:

• CPP and EI rates and thresholds adjust January 1 each year
• Maximum pensionable earnings (YMPE) and maximum insurable earnings (MIE) increase with inflation

How to stay informed:

• Subscribe to CRA email notifications for payroll updates
• Check provincial labour ministry websites quarterly
• Use payroll software that auto-updates with rate changes
• Consult with your accountant or payroll specialist annually

Part 3: Implementing Compliant Payroll Systems

Payroll Software vs. Manual Processing

Modern payroll compliance is nearly impossible to manage manually. Software automates calculations, tracks maximums, captures deductions, and maintains records.

What payroll software should do:

• Calculate CPP, EI, and income tax automatically with current rates
• Track annual maximum deductions and stop when reached
• Apply provincial rules (minimum wage, overtime, vacation pay)
• Generate remittance summaries with due dates
• Create T4 slips automatically
• Maintain 6-year record history
• Alert when remittance deadlines approach

Recommended Canadian payroll software:

• Wagepoint (Canadian, designed for SMB)
• ADP (enterprise-grade, multi-province support)
• QuickBooks Payroll (Canada version)
• Guidepoint (Canadian platform)
• Insperity (includes payroll services)

Common Payroll Compliance Mistakes

Mistake 1: Incorrect CPP Calculation

• Forgetting the $3,500 basic exemption
• Not tracking the annual maximum correctly
• Confusing CPP and CPP2 thresholds
• Prevention: Use payroll software; verify calculations quarterly

Mistake 2: Missing Remittance Deadlines

• Not knowing when remittance is due
• Confusing monthly vs. accelerated frequency
• Assuming all provinces have same deadlines (they don’t)
• Prevention: Set calendar reminders 10 days before due date; automate where possible

Mistake 3: Incomplete T4 Reporting

• Forgetting to report all income types (bonuses, vacation pay, taxable benefits)
• Creating single T4 for multi-province employee (should create separate T4 per province)
• Missing the deadline
• Prevention: Use payroll software to auto-generate T4s; pre-verify data

Mistake 4: Incorrect Overtime Calculation

• Applying federal rules to provincial employees
• Not including overtime in vacation pay calculation when required
• Misunderstanding daily vs. weekly overtime thresholds
• Prevention: Audit payroll software settings for correct provincial rules

Mistake 5: Improper Record Retention

• Deleting old payroll records “to save space”
• Not backing up digital records
• Disorganized records that can’t be found during audit
• Prevention: Use cloud-based payroll software with automatic backups

Conclusion: Payroll Compliance as Risk Management

Payroll compliance isn’t glamorous, but it’s critical. Non-compliance exposes you to:

• CRA penalties: 3–30% of amounts owed
• Interest charges: Daily interest compounds quickly
• Personal liability: Directors can be held personally liable for unremitted deductions
• Audit disruption: Audits consume thousands of dollars in time and accounting fees
• Employee relations: Errors damage employee trust
• Legal action: Employees can sue for unpaid wages, overtime, or benefits

By implementing the 10 compliance practices outlined in this guide—registering with CRA, correctly calculating CPP and EI, meeting remittance deadlines, filing T4s on time, complying with wage and hour laws, providing vacation pay, keeping proper records, and staying updated on changes—you eliminate most payroll risk.

For Canadian employers, payroll compliance is a non-negotiable investment in business stability and legal protection.

Article created for BOMCAS Canada, Edmonton & Sherwood Park. For questions about payroll compliance, CPP/EI calculations, or payroll consulting services, contact info@bomcas.ca or 780-667-5250.