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Frequently Asked Questions
Are all employees entitled to vacation pay?
Paid time off from work is a benefit enjoyed by employees in Canada, legislated by employment standards in all jurisdictions. This legislation allows for both vacation time and vacation pay. The purpose of vacation time is to provide each employee a minimum of two weeks time off work, whereas vacation pay ensures continuity of remuneration throughout the vacation period.
Vacation time is earned over a 12-month period, commonly referred to as the vacation entitlement year. This vacation entitlement year can be the calendar year, a company-established year, or the employee’s anniversary (seniority) date. Depending on the jurisdiction, vacation time must be taken within 4 to 12 months of it being earned. It is the employer’s responsibility to ensure that the legislated vacation time is taken, and as such, with adequate notice, the employer has the right to schedule vacation time for employees. In addition, many jurisdictions allow for the fractioning of vacation time. Time may be taken as a single two-week period, two one-week periods, or broken down into one-day increments in some jurisdictions, such as Ontario, with written consent from both the employee and employer. Generally, employees cannot forego their right to the minimum legislated vacation time, nor can they ask to be paid in lieu of vacation time.
Vacation pay, on the other hand, accrues as a percentage of vacationable earnings in the vacation entitlement year. These vacationable earnings vary by jurisdiction. Rather than being paid regular wages, an employee will receive vacation pay when taking vacation time. At the end of the year, an employee who has taken their full vacation time entitlement should have exhausted their vacation pay accrual. However, since some jurisdictions include additional earnings paid throughout the entitlement year as vacationable earnings (for example, overtime pay or a work related bonus), an employee may have accrued more vacation pay than they have been paid for at their regular rate of pay. This type of situation reinforces the need for a reconciliation of vacation pay owed versus vacation actually paid. Any and all outstanding balances must be paid to the employees affected within the legislated timeframe of the jurisdiction in question.
Such reconciliation should also be performed upon termination of an employee. Any unused vacation pay accrued must be paid to the terminated employee. An employer may allow employees to take vacation time prior to it being earned. Such a policy creates the possibility of vacation overpayment, particularly in the event of an employee terminating employment with the company after having taken more vacation time than has been earned. Although some jurisdictions allow for deductions from an employee’s pay for vacation overpayments, including vacation advances, it is considered a good standard of practice to get the employee’s authorization for such deductions in writing.
What are the tax implications of employer health or dental reimbursements not covered under a group plan?
A medical reimbursement made by the employer directly to the employee is considered taxable and must be included in the employee’s pay. As a cash taxable benefit, the reimbursement is subject to Canada/Quebec Pension Plan contributions (C/QPP), Employment Insurance (EI) and Quebec Pension Insurance Plan (QPIP) premiums, as well as federal and provincial income tax deductions. The reimbursement must also be reported in Box 14 and Code 40 of the T4 slip and Boxes A and L of the RL-1.
How do we determine an eligible and non-eligible retiring allowance? What are the implications for year-end reporting?
Employees who are paid a retiring allowance upon termination have the option of transferring the eligible portion of the retiring allowance directly to an RRSP without actually using any of their personal RRSP limit and while avoiding paying income taxes at source on the portion transferred. The eligible amount is determined by using the following calculation:
- $2,000 for each calendar year, or part year, up to and including the end of 1995 that the employee was employed with the company; plus
- $1,500 for each year up to and including the end of 1988 that there were no employer pension plan or deferred profit sharing plan (DPSP) contributions vested in the employee as at termination.
Any monies paid to the employee, including any eligible portion of the retiring allowance not transferred, are subject to income taxes at source.
On a T4 slip, the amount of the eligible retiring allowance is reported in Code 66 Eligible retiring allowance (regardless of any amount transferred tax-free) and Code 67 Non-eligible retiring allowance will show the non-eligible value.
For employees in Quebec, the entire amount of the retiring allowance is reported in Box O of the RL-1 slip. In addition, a footnote Code RJ is entered in the footnote code box for the full amount. You do not footnote eligible and/or non-eligible amounts separately on the RL-1 slip.
For example, an employee’s employment is terminated in October of the current year. The employee was hired in April, 1986, joined the company pension in April, 1987 and is 100% vested. At termination they received a retiring allowance of $74,000 to be paid in the current year.
Calculating the eligible and non-eligible amounts
|1986 – 1995 = 10 years x $2,000/year||$20,000|
|1986 = 1 year x $1,500/year||$1,500|
|Non-eligible ($74,000 - $21,500)||$52,500|
|Code 66 − 21,500||Box O − 74,000, code RJ|
|Code 67 − 52,500|
Must we restart CPP deductions for all employees who had already stopped CPP contributions after starting to receive their CPP pensions?
Effective the first pay period with an effective date of 2012, employers may have to deduct Canada Pension Plan (CPP) contributions from the pensionable earnings they pay their employees who are aged 60 to 70, even if these employees are receiving a CPP or Quebec Pension Plan (QPP) retirement pension.
Employees Aged 60 to 65
Under the new rules, employees aged 60 to 65 who continue to work while receiving a CPP or QPP retirement pension have to contribute to the CPP as long as they are receiving pensionable earnings.
Employees Aged 65 to 70
Under the new rules, employees who are aged 65 to 70 who work and receive a CPP/QPP retirement pension have to contribute to the CPP as long as they are receiving pensionable earnings, unless they file an election with an employer to stop paying CPP contributions and send a copy of that election to the Canada Revenue Agency (CRA).
Employees eligible to stop contributing to the CPP must meet all of the following criteria:
- employee is at least 65 but under 70 years of age;
- employee is in receipt of a CPP or QPP retirement pension;
employee has filed their election to stop contributing to the CPP with their employer using the CRA’s form CPT30 — Election to Stop Contributing to the Canada Pension Plan (with a copy sent to the CRA); AND
- employee has not filed a revocation of a prior election with their employer during the current calendar year.
- Both employee and employer CPP contributions are required to be remitted as per the employer’s remittance frequency. In other words, if an eligible employee does not choose to opt out and instead continue making CPP contributions, the employer must match these contributions and send both portions to the CRA.
Note: These changes do not affect employees who are considered disabled under the CPP/QPP or who are at least 70 years of age. That is, CPP contributions still stop when the employee is considered disabled under the CPP/QPP or after the employee turns 70. Also, these changes do not apply to Quebec employees whose pay is subject to the QPP.
A retiring allowance, as defined in subsection 248(1) of the Income Tax Act and part 1 of the Quebec Taxation Act, is an amount received upon or after retirement or termination from an office or employment in recognition of long service. This is often money paid at the discretion of the employer and not required by law. Sometimes this payment is referred to as a termination, lump-sum, or severance payment. The Canada Revenue Agency (CRA) IT Folio S2-F1-C2, Retiring Allowances provides additional technical interpretations.
The term “retiring allowance” does not necessarily mean that the individual is retiring and is used by the CRA and Revenu Québec (RQ) to describe a payment made to a terminating employee as compensation for loss of office or in recognition of past service.
Before a retiring allowance can qualify as such, the employer must establish the employee-employer relationship has been severed. If the terminated employee is still expected to perform services for the former employer, or is still accruing benefits in the company’s pension plan, an employee-employer relationship is still deemed to exist and the payment would not qualify as a retiring allowance.
Regular employment income, such as bonuses, commission payments, accumulated overtime, legislated pay in lieu of notice and vacation pay, do not qualify as a retiring allowance. However, accumulated sick leave credits paid out on termination, damages awarded to a former employee in a wrongful dismissal case and severance pay required under Ontario’s Employment Standards Act, 2000 and the Canada Labour Code, Part III, or a gratuitous severance pay in any jurisdiction, qualify as a retiring allowance. Amounts over and above the legislated minimum lieu of notice periods may qualify as a retiring allowance provided the employee-employer relationship has, in fact, been severed.
As retiring allowances are usually paid at the discretion of the employer, the amount will vary for each employee. The method of payment can vary as well. For example, some employers will pay the retiring allowance as a lump-sum payment on termination, whereas others will choose to spread this payment over a number of months, or even a number of years.
Payments that qualify as a retiring allowance are taxable using the lump-sum tax rates and are not subject to Canada/Quebec Pension Plan contributions, Employment Insurance (EI) premiums, or Quebec Parental Insurance Plan (QPIP) premiums.
When I transfer employees from Quebec to Ontario (under the same business entity and for the same employer), do I need to take into consideration the year-to-date (YTD) pensionable earnings or the YTD employee Quebec Pension Plan (QPP) contributions to calculate the Canada Pension Plan (CPP) contributions?
Transfer from Quebec to Ontario
Employees who transfer from Quebec, while working for the same employer under the same business entity, will require a reconciliation of QPP and CPP contributions. Employers must use the YTD QPP employee contributions when calculating any remaining CPP to be deducted.
The Canada Revenue Agency (CRA) has confirmed that Box 26 will be populated by pensionable earnings up to the YMPE, even if the employee has contributed at least the maximum dollars toward QPP before transferring outside of Quebec.
If an employer transfers an employee from Quebec to another part of Canada during the tax reporting year, a new reconciliation process has been established to ensure that the pensionable earnings and CPP contributions are accurately reported.
The employee will be credited with a year to date amount that is the result of:
Year-to-date QPP contributions x (CPP contribution rate ÷ QPP contribution rate)
CPP contributions would commence from this value until either the maximum annual CPP contribution has been reached or to the end of the year.
Example (2019 Rates):
An employee’s year-to-date QPP contributions prior to being transferred to Ontario is $1,050.24.
$1,050.24 x (5.10 ÷ 5.55) = $965.09
The employee will have no more than $1,783.81 deducted for CPP contributions.
$965.09 + $1,783.81 = $2,748.90
This new reconciliation process came into effect on January 1, 2019. For the 2019 reporting year, CRA expects employers to make a best effort to be compliant. For the 2020 reporting year, employers must ensure payroll systems and processes are fully compliant.
Additional details on this requirement are available in the following CRA publications:
- Guide T4001 Employers’ Guide Payroll Deductions and Remittances
- Guide T4127 Payroll Deductions Formulas
QPP contributions - EMPLOYEE TRANSFERRING TO QUEBEC
Employees who transfer into Quebec, while working for the same employer under the same business entity, will require a reconciliation of CPP and QPP contributions.
When an employee is transferred from another jurisdiction to a Quebec establishment, the year to date contribution paid into CPP is taken into consideration. The following formula is applied:
Year-to-date CPP contributions x weighting factor
The weighting factor is the result of the current year QPP contribution rate divided by the current year CPP contribution rate, rounded to four decimal places.
5.55 ÷ 5.10 = 1.0882
The result of this formula is the year-to-date amount the employee will be credited with and QPP contributions will carry on from this value.
Example (2019 Rates):
Jacques earned $20,000 in New Brunswick and paid CPP contributions of $965.04prior to moving to Quebec.
Jacques will be given credit for a year-to-date amount of $965.04 x 1.0882 = $1,050.16
If his earnings in Quebec are $45,000 he will contribute a total of $1,941.29 towards QPP for the year.
$1,050.16 + $1,941.29 = $2,991.45
An employee who has already contributed $2,748.90 in CPP contributions prior to moving to Quebec will not be required to contribute to the QPP as he attained the maximum for 2019.
Prior to her transfer to Quebec in October, Melanie had contributed the maximum CPP contribution of $2,748.90 for 2019. There will be no QPP contributions required for the current year.
$2,748.90 x 1.0882 = $2,991.45
When an employee has worked outside of Quebec during the year special reporting is required on the RL-1 slip to report the previous CPP contributions and pensionable earnings. The following footnote reporting is required:
- Footnote B-1 CPP contribution
- Footnote G-2 Pensionable earnings under the CPP
How can we best explain the bonus tax method to employees and address their concerns of a higher income tax deduction than on a regular payment?
Although a bonus payment may fall within one of the employee’s pay periods, the regular income tax tables should not be used to determine the amount of income tax owing on the bonus, as this will increase the amount of tax being deducted even more. The pay period tables apply a rate of taxation based on the assumption the employee will be making X amount of dollars for the year, spread over Y number of pay periods. A bonus payment increases the employee’s overall earnings for the year, which increases the rate at which the employee should have been paying income tax since the beginning of the taxation year.
For example, an employee receiving an annual salary of $50,000 per year in addition to a bonus payment of $10,000 will be taxed based on $60,000 per year when they file their personal income tax return at the end of the year. The employee’s income tax deductions each pay period, however, are only calculated based on an annual salary of $50,000. With a bonus payment, the payroll system is required to recalculate the employee’s taxes based on $60,000 and then calculate the difference between the income taxes the employee pays on a regular basis and the employee’s newly revised salary which has been increased by $10,000 for the entire year.
The payment of the bonus often results in the employee being bumped up to a higher income bracket. Both the Canada Revenue Agency (CRA) and Revenu Québec (RQ) require the employer to collect the difference between the pro-rated income tax that the employee regularly pays on an annual pay of $50,000 and the income taxes that would have been paid based on an annual salary of $60,000. This difference is then deducted from the bonus payment.
If an employer pays an employee additional bonuses throughout the year, the income taxes will be recalculated once again to take into consideration the previous bonuses paid to the employee.
The bonus tax method can be used for any payments that do not represent regular pay period earnings, for example, stock option taxable benefits, a taxable gift or award, or outstanding vacation paid upon termination.
When processing a bonus payment to an employee on a leave of absence such as maternity leave, when do we prepare an amended ROE and when must the employee declare those earnings?
It is the employer’s responsibility to issue an amended ROE when additional money is paid. Once received by Service Canada, the employee’s Employment Insurance (EI) claim will be recalculated to determine if it affects their benefit rate or duration. It is the employee’s responsibility to report any money to Service Canada to determine if their entitlement for a particular week of benefits is affected.
A bonus earned prior to the period of the leave of absence should not impact the employee’s EI benefits; however, the employer will often be asked by Service Canada to confirm within which periods of time the bonus was actually earned.