How Payroll Works for Canadian Small Businesses

Payroll is the process of calculating and paying your employees' wages — and remitting the required deductions to the CRA on their behalf. It is one of the most compliance-heavy parts of running a Canadian business. Missing a remittance or calculating deductions incorrectly has real consequences: penalties, interest, and personal liability for directors.

The Core Concept: Source Deductions

When you pay an employee, you do not just pay them their gross salary. You withhold three types of deductions from their paycheque and remit them to the CRA:

These are called source deductions because they are deducted at the source — before the employee ever sees the money.

What you remit to the CRA each period:

• The income tax you withheld from employees
• The employee's CPP contributions
• Your own CPP contributions (equal to the employee's)
• The employee's EI premiums
• Your own EI premiums (1.4x the employee amount)

The Payroll Cycle

1. Calculate gross pay — the employee's hours or salary for the period
2. Calculate deductions — use the CRA's payroll deduction tables (or payroll software does this automatically)
3. Pay the employee — net pay (gross minus deductions)
4. Remit source deductions to CRA — by the remittance deadline
5. Record everything in QBO — payroll expense, deductions withheld, employer contributions
6. Issue T4 slips at year-end — summary of what each employee earned and what was deducted

Remittance Deadlines

Most small employers remit source deductions monthly — by the 15th of the month following the payroll run. So January payroll is due February 15th.

If you miss a deadline, the CRA charges a penalty starting at 3% (escalating with how late the payment is) plus interest. Directors of corporations can be held personally liable for unpaid payroll remittances — this is one of the few CRA debts that pierces the corporate veil.

Payroll vs. Contractor Payments

Payroll rules apply to employees. If you pay contractors, you do not withhold or remit deductions — contractors are responsible for their own taxes. However, the CRA looks closely at contractor relationships, and misclassifying an employee as a contractor is a serious compliance risk. See: Employee vs. Contractor: What's the Difference and Why It Matters.

Abnormal Procedures

You hired your first employee and do not have a payroll account.

Register for a payroll deductions account with the CRA — it is a sub-account of your Business Number (the "RP" account). Do this before your first payroll run. Your Mesa CPA team can walk you through the registration or handle it for you.

You made a payroll error — wrong amount, wrong deductions.

Payroll corrections need to be handled carefully, especially if they cross pay periods or calendar years. See: How to Handle a Payroll Correction. Do not just adjust the next paycheque without consulting your Mesa CPA team.

You have employees in multiple provinces.

Provincial income tax and some other rules (like minimum wage, vacation pay) vary by province. Your payroll software needs to be set up for the correct province of employment for each employee.

FAQ

Do I need payroll software?

For more than one or two employees, yes. Manual payroll calculation is error-prone and time-consuming. QBO Payroll, Wagepoint, and Humi are common Canadian options. Your Mesa CPA team will recommend what fits your size and setup.

Does payroll apply if I am the only employee (paying myself a salary)?

Yes. If you are a corporation paying yourself a salary, payroll rules apply — you need to withhold deductions from your own salary and remit them to the CRA, just like any other employee.

What is the difference between a salary and dividends?

Salary goes through payroll, has deductions, and is a business expense. Dividends come from after-tax corporate profits, have no source deductions, and are reported on a T5 slip. Most owner-operators use a combination of both. Your Mesa CPA advisor can help you determine the optimal split for your situation.

What happens if I cannot make a remittance on time?

Call the CRA before the deadline — in some cases they can arrange a payment plan. If you are a director, take this seriously: personal liability for payroll remittances is one of the most consequential risks in running a corporation.