Source deductions

What gets withheld

After you open a payroll account, you calculate three deductions from what you pay employees: CPP contributions, EI premiums and income tax. The correct amounts vary with the employee’s circumstances, your own status as an employer, what kind of employment it is, what kind of payment you are making and which province the work is done in. You also calculate your own share of CPP and EI.

The rates and maximums change by year, so work from the CRA’s published figures or its payroll deductions calculator for the year of payment rather than last year’s numbers.

Held in trust

Every amount you deduct is deemed to be held in trust for the government until you remit it. In law it is treated as a separate fund rather than as your property. That means the withheld money cannot sensibly sit in operating cash to cover rent or suppliers, even briefly.

When a corporation fails to deduct or remit, its directors at the time can be jointly liable with it for the amount, including penalties and interest. The CRA says it will not hold directors personally responsible when they take action to make sure the deductions and remittances are made.

An illustrative example

Suppose a Dundas café owes an employee $2,000 of gross pay for a period. Illustratively, it withholds $350 in total for CPP, EI and income tax and pays the employee $1,650. It then adds $120 of employer CPP and EI, so $470 goes to the CRA by the due date set by its remitter type. The business’s payroll expense is $2,120, while the employee’s take-home is $1,650.

Those figures are illustrative only and not a real calculation.

Errors and penalties

If you under- or over-deduct, tell the employee as soon as you know, then correct the records before or after you file the information return, depending on timing. If required amounts were not deducted at all, the CRA applies a 10% penalty on the amounts not deducted, 20% for a second or later failure in a calendar year if it was knowing or grossly negligent, plus interest. Serious non-compliance can lead to prosecution.

Source deductions are not the same thing as paying them in: see payroll remittance and remitter type for the timing.

What to discuss with your accountant

Ask whether each worker is an employee or a contractor, since the label alone does not decide it, and who collects TD1 forms and checks the calculations. Confirm that payroll liability accounts reconcile to what you have sent to the CRA, and that the year-end T4 totals match.