Chapter 11
Payroll
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jurisdiction.The business can accumulate the vacation pay each time payroll is processed, and then
pay it out when the employee takes vacation. In this situation, the employee will always receive a
paycheque, even when on vacation.
Alternatively, the business can pay the extra vacation amount on every paycheque. In this case, the
employee receives a slightly higher pay on every paycheque, but will not be paid any amount when
they take vacation. For example, suppose an employee has a gross pay of $780 on their paycheque
and assume vacation pay will be paid out at 4%.The employee will receive an extra $31.20 ($780 x
4%) on their paycheque, increasing their gross amount to $811.20 ($780 + $31.20).
The gross pay shown on a pay stub is not the amount that is deposited into an employee’s bank
account. Gross pay is reduced by statutory and voluntary deductions, leaving a net pay amount.The
amounts that are subtracted from a paycheque are referred to as payroll deductions.
Employee Payroll Deductions
Statutory Deductions
Every business is required to subtract (withhold) amounts from an employee's gross pay. Statutory
deductions are paid to the appropriate tax authority in the country. In most of Canada, the sole
payroll tax authority is the Canada Revenue Agency (CRA). In Quebec, businesses must work
with Revenu Quebec (RQ) in addition to the CRA. Statutory deductions in Canada are
• Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) in Quebec
• Employment Insurance (EI)
• Quebec Parental Insurance Plan (QPIP) in Quebec only
• Federal and Provincial income tax
Each of the above statutory deductions is calculated using software or tax tables, which are
updated annually.The calculated amounts are then subtracted/withheld from an employee's gross
pay. The business is responsible for keeping track of payroll and the associated deductions and
must send the amounts deducted to the appropriate tax authority (CRA or Revenu Quebec).
For the purposes of this chapter, we will focus on a business that is not located in the province of
Quebec. Most of what is discussed regarding CPP, EI and income taxes will apply to businesses
operating in Quebec.
The amounts withheld are required under law and failure to withhold the amounts from the
employee's pay and remit them to the tax authorities can result in severe penalties.
At the end of the year, the employer provides all its employees with a tax slip indicating their
gross pay and all the statutory deductions for the year. This is called a T4 slip. This slip is used by
employees to prepare their tax returns to the government. Any difference between the amount
already submitted to the government and the amount actually owed results in the employee either
getting a refund (they paid too much over the year) or paying extra (they did not pay enough over
the year).The system is designed this way to reduce the financial burden on individuals who, if they
