Compliant payroll practices require employers to withhold income taxes following very specific criteria. In addition to making the correct income tax withholdings, both the Canada Revenue Agency (CRA) and the Ministére du Revenu du Québec (MRQ) have established the following responsibilities for employers:
- to deduct Canada/Quebec Pension Plan (CPP/QPP) contributions, Employment Insurance (EI) premiums, and federal and provincial income tax from amounts paid to employees;
- to remit these deductions, along with the employer’s share of CPP/QPP contributions and EI premiums, throughout the year on employees’ behalf (plus in Quebec, the employer’s share of Quebec Health Services Fund, the levy for the Commission des normes du travail and the training levy); and
- to report the employee’s income and deductions on the appropriate information slip/s (T4/T4A/RL-1/RL-2) by the end of February of the following calendar year.
To properly calculate and withhold income taxes from employment income paid to employees, the employer needs to understand the rules for establishing an employee’s province of employment. This
means knowing from a payroll perspective, which provincial payroll deductions tables to use along with the proper province set up within the payroll system. To comply with these rules, the employer must determine the employee’s province (or territory) of employment, as opposed to the employee’s province (or territory) of residence. This depends on whether or not the employee physically reports for work at the employer’s place of business, or “permanent establishment.”
In general terms, if an employee physically reports for work at the employer’s place of business, the province of employment is the province in which the employer’s business is located. For withholding
purposes, the employer will use the payroll deductions tables for that province and ensure that the province is set up correctly in the payroll system. This is extremely important as there are some systems where the province of employment is driven by residency rules thereby requiring the employer to manipulate the data per CRA/MRQ requirements.
The following examples will assist in determining an employee’s province of employment for withholding purposes from a CRA perspective. MRQ requirements follow.
The head office is in Ontario, but you require your employee to report to your place of business in Manitoba. In this case, use the Manitoba Payroll Deductions Tables. This employee’s province of employment for withholding should be set up in the payroll system as Manitoba.
The employee lives in Quebec, but you require your employee to report to your place of business in New Brunswick. In this case, use the New Brunswick Payroll Deductions Tables. This employee’s province of employment for withholding should be set up in the payroll system as New Brunswick.
If you do not require your employee to physically report for work at your place of business, (for example, per the employment contract, the employee works from a home office), the employee’s province or territory of employment is the province or territory where your business is located and from where you pay your employee’s salary.
The employee does not have to report to any of your places of business, but payroll is processed from your head office in Quebec and your employee is paid from this office. In this case, use the Quebec Payroll Deductions Tables. This employee’s province of employment for withholding should be set up in the payroll system as Quebec.
If you have employees working in Canada but you do not have a permanent or deemed business establishment in Canada, the employees are considered employed in Canada beyond the limits of any province for purposes of tax at source.
Your Canadian resident employees work as salespeople in Ontario and British Columbia. They work from their home offices and report directly to your business located outside Canada. In this case, use the In Canada Beyond the Limits of any Province or Outside Canada Payroll Deductions Tables. Employers will need to confirm with their system or service provider how to ensure the proper set up regarding province of employment for these individuals.
Based on the above criteria, there can be situations where an employee who lives in one province but works in another may be subject to excessive tax deductions. This could be true of an employee living
in Ontario but reporting for work at the employer’s establishment in Quebec. In this case, the employee can ask for a reduction in tax deductions by requesting a letter of authority from any CRA tax services office. Upon acceptance of the request, CRA will provide a response to the employer, allowing for a reduction in withholdings at source.
For Quebec purposes employees may claim a reduction in withholdings at source through the Application for a Reduction in Source Deductions of Income Tax (form TP-1016-V). On the other hand, there can be situations where an employee who lives in one province but works in another may not have enough tax deducted. This could be true for an employee living in Quebec but reporting to work in Ontario. In this case, the employee would be set up on payroll with Ontario as the province of employment and would have taxes withheld accordingly. However, on T1 filing, which is based on residency status as of December 31 of the taxation year, this individual would file a Quebec T1 and could in fact owe additional taxes.
In this situation it is recommended that employees request additional tax deductions at source to help eliminate the possibility of a tax shortage. This request can be made by completing the applicable area of Form TD1, Personal Tax Credits Return, and giving it to the employer. Quebec employees can elect to request additional provincial income tax withholdings by completing the applicable area of the Source Deductions Return form TP-1015.3-V.
Generally speaking MRQ follows similar rules for determining province of employment. The MRQ includes the following information in the Guide for Employers’ Source Deductions and Contributions.
Employers must withhold Quebec statutory deductions from amounts paid to an employee:
- who reports for work at one of the employer’s establishments in Québec,
- or from amounts paid to an employee who is not required to report for work at any of the employer’s establishments (in Québec or elsewhere), but is paid from one of the establishments in Québec.
In addition to these requirements employers must also be cognizant of the governments definition of “permanent establishment”. Both the Income Tax Act and the Quebec Taxation Act provide these definitions.
Payments other than employment income
The above illustrations and examples deal with employment income. If you are an employer processing pensioner payments the rules for withholding are based on the pensioner’s province of residence.
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