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      Calculating Payroll Remittances

      How to calculate how much the client tneeds to have in their payroll account by year end for t4 slips.

      Payroll calculations and source deductions:

       

      Source deductions:

      • Definition: Amount of tax withheld by the company/employer from wages/salary and paid over to the CRA on behalf of the employee, including CPP and EI.
      • The employer is liable to remit the CPP, EI and taxes to the CRA by the 15th of the month, following the end of the previous month.
        • For example, Source deductions withheld for month ending 28 February 2021 must be remitted(paid) to the CRA by 15 March 2021.
      • If the company has employees with fixed salaries, and the source deductions are the same on a monthly basis, then the company can setup recurring payments for the source deductions amount, to go off their bank account on the 12th of every month.
        • Some banks allow you to set this up online. Other banks, you might have to get a teller to set up recurring payments.
        • You will need to give the bank your payroll account number that is registered with the CRA so that the remittances are allocated correctly to the company’s CRA payroll account.

       

      CPP:

      • Employer pays 50%  & employee pays 50% of CPP
      • 50% is deducted from the employees pay cheques
      • The other 50% is the  paid by the employer, and is an additional cost over and above Gross Payroll
      • The company is therefore not liable/does not incur the full 100% contribution
      • If you are self-employed, you pay the full 100% yourself. % is based on your net business income (after expenses).
      • CPP contribution % for 2021 = 5.45% X 2 = 10.9%
        • https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/canada-pension-plan-cpp/cpp-contribution-rates-maximums-exemptions.html
      • The first 3,500 of annual gross salary is exempt from CPP (‘basic exemption amount’). This can be divided into each pay period for a more detailed pay period exemption calculation as per the below:
      • CPP limits for 2021:
        • Maximum employee contribution = $3,166.45
        • Therefore total contribution employer will pay for 2021 = $6,332.90
        • Maximum pensionable earnings for 2021 = $61,600. This applies to EACH employer an employee works for during a financial/tax year.
        • Any over deduction of CPP is refunded to the employee on assessment of their personal tax return.

       

      Benefits to paying some salary:

      • Increases RRSP contribution room.
        • Contribution room is based on % of ‘earned income’. Salary/wages are earned income. Dividends are NOT earned income, therefore do not increase contribution room.
      • Employment income means you will qualify for long-term disability
      • Have access to the home buyer’s plan ‘HBP’.
      • If looking for home loan financing, banks may slightly prefer salary to dividends.

       

      Important things to note when doing payroll calculations (Corporation to owner/employee):

      1. Company must register for a payroll account through the CRA ‘MyBusiness’ account.
      2. Consider how much money you need on a monthly basis, to cover costs in the company:
        • GST
        • Professional/accounting fees
        • Insurance
        • Debt repayments
        • Software costs
        • Supplies
        • Any other general monthly expenses the company incurs

       

      1. Consider how much money you need monthly for your personal expenses
      2. Then, do the following:
        • Your best estimate of monthly income, LESS
        • Costs to be covered in the company, =
        • Money left in the company that could be drawn out as a salary
      3. The amount of tax withheld from the salary you decide on can be reduced if you want to pay tax in when submitting your tax return, or increased if you would prefer a refund (no penalties for underpayment of source deduction).
      4. CPP contributions must be paid in full. If not there will be penalties imposed.
      5. If taking out only a smaller salary, and relying more on dividends, it is important to keep a % of the dividends aside for tax that will be payable at a later stage on this income (no source deductions on dividend income).

       

      EI:

      • If your company has 1 shareholder, that is an employee and holds 100% of the shares, there will be no EI deducted from the salary.

      If you are self-employed, there is a separate program for sole proprietors.