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Overview of Canadian Income Taxes

Payroll is the main source of taxes in every state today.  In fact, more than $250 billion of payroll taxes are collected every year by the federal and provincial governments of Canada.  The truth is that in all provinces and territories, payroll is taxed by a number of agencies.

The CRA

The CRA is the main federal agency that taxes payrolls.  The CRA takes taxes from the following revenue sources:

• Contributions to the Canada Pension Fund

• Overpaid EI benefit garnishments

• Remittances from employers for the Nova Scotia Workers’ Compensation Board

• HST and GST sales taxes everywhere but Quebec

• Premiums for employment insurance

• Personal income taxes paid to provincial and federal governments

In Quebec

In Quebec, government tax revenue has been centralized similarly to CRA taxes.  The following is taken by Revenu Quebec from payrolls:

• Contributions to the Quebec Pension Plan, Commission des normes du travail and Health Services Fund

• Personal income taxes

• Premiums for Quebec Parental Insurance Plan

• Compensation taxes given to financial institutions

• WCB premiums paid to the Commission de la sante et de la securite du travail

• Quebec Sales Tax and GST on taxable benefits that are RL-1 reported

• 9-percent sales tax on benefits given to employee groups

Other Payroll Taxes

Some payroll taxes are remitted to governments of provinces and territories:

• The Northwest Territories and Nunavut 2-percent payroll tax

• 9-percent Quebec and 8-percent Ontario sales tax levied on benefits given to employees

• Payroll taxes used for funding health care in the provinces of Ontario, Newfoundland, Manitoba and Labrador.

• In all territories and provinces but NS, worker’s compensation premiums

Payroll departments must be aware of which government is taxing them and whether different taxes are paid by the employer or employees.  All levels of Canadian government are able to tax income, and rates vary based on the province or territory.  In every location, employers must know which tax rates are applicable to their payroll, whether they must contribute to Ontario EHT or Quebec HSF and whether their staff must pay QPP or CPP.  The location of a worker’s permanent place of employment determines which area’s income tax rates apply.

Employment Provice

An employer’s province also affects many other types of payroll taxes except those that follow:

• In the Northwest Territories and Nunavit, the 2-percent tax on payroll depends on the physical enactment of work duties in those areas.  This means that the income of telecommuting or online workers would still be taxed at the 2-percent rate.

• Physical location also determines WCB premiums paid by employers.  Although the Federal Canada Labour code does not regulate WCB for employment, employers regulated by the federal government are required to give WLRP benefits that equal WCB coverage that would apply in other circumstances.

• Province of residence determines T4A reportable income, income calculated with lump-sum withholding and retirement allowances.  If a person moves to another province after retiring, that person’s rate of lump sum withholding would change.  In addition, an RL-1 would not be used to report it.

Employment province is not the only factor affecting payroll taxes.  In cases where employees work both inside and outside of a province within a pay period, employees may pay different rates depending on whether they are in, for example, Quebec or Ontario.  Group benefit payments depend on location of residence, but sales taxes on group benefits paid by employees vary based on the location of the employer.  Employees pay 2-percent NT and NU payroll taxes as well as personal income tax.  Meanwhile, employees and employers share payment of QPP, QPIP, CPP, EI, QC and ON sales taxes.  Finally, other Quebec payroll taxes and WCB premiums are paid by employers.

References:

1) http://wagepoint.com/blog/payroll-taxes-canada

2) http://www.hrpayrollsystems.net/hris-articles/

 3) http://www.hrpayrollsystems.net/payroll-general-ledger-and-taxes-defined/

Miles Browing wrote this article.

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