Hiring Your First Employee
By Julie King | October 31, 2006
Expanding your business to include outside employees can be a daunting task for business owners. When you hire someone you take on added responsibility. Yet you are also taking an important step in moving beyond being self-employed.
To help address the most common issues we contacted Canada Revenue Agency to find out the basic requirements that employers must follow.
Who can hire employees?
Generally speaking, anyone in Canada can hire employees. The Canada Revenue Agency (CRA) will generally consider you to be an employer if you pay salaries, wages (including advances), bonuses, vacation pay, or tips to your employees; or you provide certain taxable benefits or allowances, such as board and lodging, to your employees.
You do not have to be a registered company. You will, however, need a registered Business Number (BN) with a payroll deductions account before the employee starts work.
To register for the Business Number and Payroll Deductions account you can call CRA's toll free number 1-800-959-5525 (English) or 1-800-959-7775 (French), complete a Request for a Business Number (RC 1) form to be sent by mail or fax to CRA or register online at https://www.canada.ca/en/revenue-agency (English) or https://www.canada.ca/fr/agence-revenu (French).
Tip: Be careful if you plan to hire people on a contract basis to avoid the hassle (and cost) of managing employees. CRA may consider you to be an employer even if you have a written contract that identifies a worker as an independent contractor.
The Paperwork: When an Employee Starts Work
Once hired you must:
- get your employee's social insurance number; and
- have the new employee fill out TD1 Form Personal Tax Credits Return - Canada.ca
Tip: While not required by the government, it is a good idea to put your job offer in writing. Lin Grensing-Pophal, author of The HR Book, recommends that the offer include salary, job duties, terms of relocation, benefits, work hours, probationary period and the starting date. Your job offer must comply with the employment standards for your province or territory.
The Process: Paying Employee(s)
Provincial & Territorial Legislation
As an employer you must conform with the Employment Standards legislation for your province or territory. This typically includes:
- guidelines regarding the payment of wages;
- minimum wage thresholds;
- vacation pay rules; and
- guidelines for hours or work, breaks, and payment of overtime
As an example, the Employment Standards legislation in most provinces will address the payment of wages, yet there is a fair amount of variation in the actual legislation. In British Columbia employers must pay employees at least twice a month, in Alberta they have the option of paying employees on a monthly basis, and in Ontario there is no minimum time period to pay employees but employers must set a recurring payroll time period (e.g. weekly, biweekly or on certain days each month).
Therefore it is critical to review the employment standards for your own province or territory.
Note: Federally incorporated companies may have some variation; depending on the type of work being done some are governed by the provincial legislations while others - like banks - must adhere to federal legislation.
Assuming that you have conformed with the Employment Standards legislation for your province or territory, when you actually pay each employee you are required to withhold what is known as "source deductions", which you then remit to the federal government.
As an employer you are responsible for deducting:
- Federal tax
- Canada Pension Plan contributions
- Employment Insurance premiums
Calculating the amount to be deducted:
There are several ways to determine what you need to deduct from each employee's paycheque. You can:
- purchase an accounting software package with a payroll module that will do these calculations for you
- use a payroll service, where an outside firm manages your payroll
- use the Payroll Deductions Online Calculator https://www.canada.ca/en/revenue-agency/services or find other alternatives online
- use manual tables provided by the government (you will need to reference several different tables)
Note: When each employee fills out the Form TD1, this in turn will give them a federal claim code. The federal claim code, which you can get by entering the basic amount from the Form TD1 in your payroll software or by looking them up manually in the goverment tables, determines their tax rate.
Additional provincial & territorial deductions:
You need to check with your provincial or territorial government to determine what, if any, deductions are required. Health premiums and workers' compensation deductions may be required. (There are sometimes minimum income levels that will exempt smaller companies from things like health care premium deductions.) Be sure to visit the Workers' Compensation website for your province or territory to determine whether or not you need to pay into workers' compensation.
Annual Obligations: Employers file a T4 for each employee with the federal government at the end of each tax year. T4 information returns must be post-marked by the last day in February in the following year. So the filing date for the 2006 tax year would be February 28, 2007. You must provide two copies to each employee by that date as well. Penalties for late filing can be $25 a day up to a maximum of $2500.
The Process: Remitting to the Government
When making your first remittance, you need to send a cheque or money order with the correct deductions to the taxation centre along with a letter.
The letter should state that:
- You are a new remitter
- The period the remittance covers
- Your company name, address and business telephone numberÂ
- Your Business Number
After making this first remittance, the CRA will send a remittance form in the mail for the next remittance, and continue to send one each time we receive payroll remittances.
The CRA can assess a penalty of 10% and up to 20% of the amount that the employer failed to remit. Normally, this penalty is applied to the part of the amount the employer failed to remit that is more than $500.
Employers are required to keep the following records:
- The time worked by each employee,
- Documentation to support the CPP contributions,
- EI premiums and income tax withheld,
- Form TD1, Personal Tax Credits Return,
- CRA letters of authority for reducing income tax at source,
- All information slips issued and returns filed, and
- Registered pension plan information.
Termination of employment
When an employee leaves, the employer must complete and issue a Record of Employment (ROE). This form is used to determine if the employee is entitled to EI benefits and for how long. The employer may also want to issue the employee's T4 slip. A copy of the slip should be filed along with the T4 information return that is due before the last day of February of the following year.
Other Considerations: Legal Entitlement to Work in Canada
You need to ensure that the person is legally entitled to work in Canada. Under the Immigration Act, only the following persons are authorized to work in Canada:
- Canadian citizens;
- Permanent residents; or
- Persons who have a valid employment authorization.
An eligible person who is not a Canadian citizen or a permanent resident of Canada and who applies for a SIN will get a SIN beginning with the number "9." That person will be authorized to work only for a particular employer, and must have a valid employment authorization issued by Citizenship and Immigration Canada. If you hire a person whom you know is not a Canadian citizen or permanent resident, make sure that:
- the person's SIN begins with the number "9";
- the SIN card has an expiry date; and
- the person has a valid employment authorization which states that he or she will work only for you.
Useful Web Resources
CRA Payroll Web pages:
CRA Payroll cycle:
Understanding Your Pay - The Canadian Payroll Association Video https://www.youtube.com/watch?v=lH4a2_aY4po