Hiring your first employee changes your relationship with the CRA. Up to that point you were reporting your own income. Now you’re collecting money on the government’s behalf, holding it in trust, and remitting it on a schedule — with penalties attached to every step.
It isn’t complicated. It is unforgiving. Here’s the whole sequence.
Step 1: Open a payroll account
Before your first payday you need a payroll program account — your business number followed by RP0001. You can register through CRA My Business Account or by phone. If you don’t already have a business number, you get one at the same time.
Do this before you pay anyone, not after. Remitting without an account creates a mess that takes weeks to untangle.
Step 2: Confirm they’re an employee
Employee or independent contractor is not your choice to make — the CRA applies its own tests, looking at control over how the work is done, who supplies the tools, whether the worker can subcontract, the degree of financial risk they carry, and their opportunity for profit.
Get this wrong and the CRA can reassess you for years of unremitted CPP and EI, plus penalties and interest. When it’s genuinely unclear, you can request a ruling from the CRA.
Step 3: Collect the paperwork
Every employee completes a federal TD1 and a provincial or territorial TD1 so you can calculate income tax deductions correctly. You also need their SIN. Keep both on file.
Step 4: Calculate deductions
Three things come off every paycheque:
- CPP (Canada Pension Plan). Contributions apply to pensionable earnings above the annual basic exemption of $3,500, up to the year’s maximum pensionable earnings. Since the CPP enhancement, there is also a second tier of contributions on earnings between the first and second earnings ceilings. The employer matches the employee’s CPP contribution dollar for dollar.
- EI (Employment Insurance). Deducted on insurable earnings up to the annual maximum. The employer pays 1.4 times the employee’s premium.
- Income tax. Federal and provincial, based on the TD1 forms and the pay period.
Rates and maximums change every January. Use the CRA’s Payroll Deductions Online Calculator or current-year payroll software rather than last year’s numbers — this is the most common source of quiet, compounding errors.
Two of the three costs above are matched or exceeded by the employer. Budget for an employee costing meaningfully more than their salary.
Step 5: Remit on time
Deductions plus your employer contributions go to the CRA on a schedule set by your average monthly withholding amount. Most new and small employers are regular remitters: due by the 15th of the month following the month you paid.
Larger payrolls move to accelerated schedules with much tighter deadlines. The CRA notifies you if your category changes.
Late remittance penalties escalate with how late you are and whether you’ve been late before, and in serious cases the CRA can assess directors personally. This money was withheld from employees — the CRA treats it as trust funds, not as your working capital. Related dates are in our small business tax deadlines guide.
Step 6: File T4s
By the last day of February, file T4 slips and the T4 Summary with the CRA and give employees their copies. Slip totals must reconcile to what you actually remitted during the year.
The full walkthrough, including the boxes people commonly get wrong, is in T4 Slips Explained: Deadlines, Penalties & How to File.
Step 7: Issue an ROE when someone leaves
A Record of Employment is required whenever an employee has an interruption of earnings — termination, resignation, layoff, or leave of any kind including parental and sick leave. It’s what Service Canada uses to determine EI eligibility.
ROEs are filed electronically through ROE Web, and deadlines are short — measured in days, not weeks, from the interruption or the end of the relevant pay period. Confirm the current requirement for your filing method on the Service Canada site.
Mistakes that cost real money
- Using last year’s CPP and EI rates in January
- Forgetting to add taxable benefits to pensionable and insurable earnings
- Treating an employee as a contractor
- Missing the CPP basic exemption on the first pay of the year
- Spending remittances during a tight month
- Getting statutory holiday pay wrong under provincial employment standards
- Filing an ROE weeks late, leaving the former employee unable to claim EI
Should you run it yourself?
Payroll for one or two salaried employees on a fixed schedule is manageable with good software. Payroll with hourly staff, variable shifts, tips, benefits, multiple provinces or frequent turnover eats a surprising amount of time every single pay period.
Compare that against the cost of outsourcing it — How Much Does a Bookkeeper Cost in Canada? has the numbers. Industry-specific payroll complexity is covered in Bookkeeping for Restaurants in Canada.
EverBooks processes payroll on time with accurate deductions and full CRA compliance for employers across Canada. See our payroll solutions or book a free consultation.