Chapter

1
Payroll and Its Compliance
Environment

Learning Objectives:

Upon completion of this chapter, you should be able to:

1. Describe payroll’s objectives.

2. Describe who payroll’s stakeholders are.
3. Differentiate between federal and provincial/territorial jurisdictions.
4. Explain how each stakeholder affects payroll processes and procedures.
5. Apply the Canada Revenue Agency’s factors for determining whether an
individual is an employee or self-employed.

Communication Objective:

Upon completing this chapter, you should be able to explain how the employee-
employer relationship is determined.

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Chapter Contents

Introduction ........................................................................................................................ 1-3

Payroll Objectives and Definitions .................................................................................... 1-4
Requirements of a Payroll Professional ............................................................................. 1-6
Technical Skills .............................................................................................................. 1-7
Personal and Professional Skills .................................................................................... 1-8
Behavioural and Ethical Standards ................................................................................ 1-8
The National Payroll Institute’s Code of Professional Conduct .................................... 1-9
Content Review............................................................................................................ 1-10
Payroll Stakeholders ........................................................................................................ 1-11
Government Stakeholders ............................................................................................ 1-12
Federal Government..................................................................................................... 1-13
Provincial/Territorial Governments ......................................................................... 1-14
Legislative Changes ................................................................................................. 1-15
Legislative Compliance ........................................................................................... 1-16
Self-Assessment ....................................................................................................... 1-17
Internal Stakeholders ................................................................................................... 1-18
External Stakeholders .................................................................................................. 1-19
Content Review............................................................................................................ 1-22
The Employee-Employer Relationship ............................................................................ 1-23
Contract of Service ...................................................................................................... 1-24
Contract for Service ..................................................................................................... 1-24
Factors used to determine the type of contract ............................................................ 1-26
Control ..................................................................................................................... 1-27
Tools and Equipment ............................................................................................... 1-28
Subcontracting Work or Hiring Assistants .............................................................. 1-29
Financial Risk .......................................................................................................... 1-29
Responsibility for Investment and Management ..................................................... 1-30
Opportunity for Profit .............................................................................................. 1-30
Content Review............................................................................................................ 1-33
Common Situations.......................................................................................................... 1-34

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Introduction
Payroll is an exciting career choice because it is dynamic and offers many opportunities for
personal and professional growth. Payroll professionals can expand their knowledge in
human resources and finance through their interaction with these departments in the
performance of their positions. In this chapter, we will look at the skills and knowledge
required of a payroll professional, as well as some basic payroll-related definitions, terms and
concepts. We will also discuss the various stakeholders the payroll professional has to deal
with and their compliance requirements. These stakeholders include individuals, groups and
agencies, both internal and external, that are interested in payroll.

Payroll is necessary for every organization with employees, as each employee expects to be
paid for their work. While the amount of maximum remuneration that an employee receives
for their work is not legislated by any government (unless the employee is a federal or
provincial/territorial civil servant), there is legislation in place at both the federal and
provincial/territorial levels that govern many aspects of processing employees’ pay, their
taxable benefits and observing their rights as employees.

It is important to note that this course deals with payroll, the function of paying employees
for work performed for employers. Self-employed workers or contractors who submit
invoices for their work and receive payment through accounts payable and not payroll are not
employees. This chapter illustrates how to determine if an employee-employer relationship
exists. Once an employee-employer relationship has been established, the correct payment
method for services can be determined.

The federal and the Québec governments provide factors that can determine whether an
employee-employer relationship exists. Determining the relationship between the worker and
the organization is crucial and ensures that any payments made comply with legislation.

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Payroll Objectives and Definitions

The primary objective of the payroll function in every organization is to pay employees
accurately and on time, in compliance with legislative requirements, for a full annual payroll
cycle.

Every employee expects to receive their pay on the day it is due in the manner arranged with
their employer, usually by cheque or direct deposit. In addition to ensuring that employees
have been paid, payroll professionals must also be able to communicate payroll information
to all stakeholders.

Payroll Compliance Legislation refers to the following concepts.

Payroll is the process of paying employees in exchange for the services they perform. The
term payroll can refer to:

• The department that is responsible for processing payroll.

Example:
The payroll department in Chambers Inc. has three full-time employees.

• The total number of people employed by an organization

Example:
Chambers Inc. has 78 people on the payroll.

• The wages and salaries paid out in a year.

Example:
For the current year, the total payroll for Chambers Inc. was $4,250,000.00.

• A list of employees to be paid and the amount due to each

Example:
Chambers Inc. – December 20, 20XX payroll register – (partial details are provided
in this example)

Adams, Fred $3,000.00

Berlin, Kelly $3,370.00
…………………
Matthews, James $1,360.00
Perley, Olive $2,415.00
Total Payroll $157,215.00

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Legislation refers to laws enacted by a legislative body. In Canada, there are many
legislative sources that payroll professionals must comply with at two separate levels ─ the
federal and the provincial/territorial governments. Later in the chapter, we will explore the
compliance requirements for the various pieces of legislation from these sources.

Compliance is the observance of official requirements. This means performing payroll

functions according to federal and provincial/territorial legislative and non-governmental
stakeholder requirements for payroll professionals.

The legislative requirements are termed statutory. This means they are enacted, created, or
regulated by statute, a law enacted by the legislative branch of a government. Fines and
penalties can be imposed if an organization does not comply with the legislative
requirements in each jurisdiction.

When dealing with federal and provincial/territorial government agencies, payroll

professionals must know the many pieces of legislation that regulate their work and the
compliance requirements associated with each. Payroll professionals are responsible for
ensuring their organization is compliant with all payroll related legislation, thus eliminating
the potential for any fines or penalties.

In payroll, there are also compliance requirements from other non-government stakeholders,
for example, union collective agreements or group insurance policies. Therefore, Payroll
professionals must ensure the organization complies with all stakeholder requirements.

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Requirements of a Payroll Professional

As illustrated in the following diagram, those who work in payroll need specific information
and skills to assist them in their role as effective payroll professionals.

Diagram 1-1 – Payroll Professional Knowledge

INFORMATION + SKILLS
• Payroll Compliance • Technical Skills
• Payroll Processes • Personal Skills
• Payroll Reporting • Professional Skills

PAYROLL

PROFESSIONAL

KNOWLEDGE

The responsibilities of the payroll professional will differ depending on the size of the
organization, the number of jurisdictions in which they pay, the reporting structure under
which they work, and whether there are other related departments, such as human resources,
finance and administration in the organization.

Small and medium-sized organizations may have payroll professionals whose positions
include other functions that, in a larger organization, would fall under other departments.
This payroll professional may be required to handle multiple tasks, such as employee
recruitment, human resource policy development, benefits administration, accounts payable,
accounts receivable, budgets or administration. These professionals must have excellent
knowledge of all areas for which they are responsible and be aware of the resources available
to provide advice and information.

Larger organizations may have a distinct payroll department with specific payroll positions,
in addition to separate human resources, accounting and administration groups. Even in a
multi-departmental organization, payroll professionals must know the various stages of the
employment cycle of an employee. From hiring through termination of employment, many of
these stages will impact how to produce the employee’s pay and prepare required reports.

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The payroll department in a large organization may have:

• Payroll administrators who are responsible for entering payroll data into the system
and making required payroll remittances.
• Payroll coordinators who are responsible for preparing the payroll journal entries and
reconciling the payroll related accounts.
• Payroll managers who manage the payroll function the payroll staff and represent
payroll at the management level.

Payroll Content Knowledge

Payroll professionals should know the following to perform their duties effectively:

• Payroll Compliance Legislation: the Income Tax Act, the Employment Insurance
Act, the Canada Pension Plan Act, Employment/Labour Standards, privacy
legislation, Workers’ Compensation and provincial/territorial payroll-specific
legislation
• Payroll Processes: the remuneration and deduction components of payroll and how
to use these components to calculate a net pay in both regular and non-regular
circumstances
• Payroll Reporting: calculating and remitting amounts due to government agencies,
insurance companies, unions and other third parties. In addition, payroll reporting
includes accounting for payroll expenses and accruals to internal financial systems
and federal and provincial/territorial year-end reporting.

Technical Skills
The technical skills payroll professionals require include proficiency in computer programs
such as payroll software and financial systems, spreadsheets, databases and word processing.

Organizations often change their payroll and business systems to meet new technology
requirements and corporate reporting needs. Payroll personnel need to have the ability to be
adaptable to changing systems. As a payroll professional, you must be prepared and willing
to embrace continuous learning.

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Personal and Professional Skills

The following personal and professional skills will assist payroll professionals in dealing
with the various stakeholders involved in the payroll process:

• written communication skills, such as preparing employee emails and memos,

management reports, policies and procedures and correspondence with various levels
of government
• verbal communication skills, to be able to respond to internal and external
stakeholder inquiries
• the ability to read, understand and interpret legal terminology found in documents
such as collective agreements, benefit contracts and government regulations
• excellent mathematical skills to perform various calculations
• problem solving, decision-making, time management and organizational skills

Behavioural and Ethical Standards

Behaviour and ethics are two areas that build on the skills that an effective payroll professional
must have. Effective payroll professionals should be:

• trustworthy, as the potential for fraud is ever present

• conscientious, with keen attention to detail
• discreet due to the confidential nature of the information being handled
• tactful in dealing with employees who can be very sensitive when discussing their
financial issues
• perceptive, able to understand all sides of an issue
• able to work under the pressures of absolute deadlines
• able to use common sense to recognize problems quickly and apply sound solutions
• able to remain objective and maintain a factual perspective when dealing with
questions and inquiries

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The National Payroll Institute’s Code of

Professional Conduct
Given the significant impact of payroll on organizations and the high potential for ethical
issues in this area, the National Payroll Institute has created its own Code of Professional
Conduct to guide members and ensure the integrity of payroll.

The Code of Professional Conduct provides the minimum standards of professional

behaviour that apply to all members and students and addresses personal accountability and
integrity issues. The Code reflects the Institute’s values of community, professionalism and
authoritative knowledge and holds Institute certification holders, members and students to a
high ethical standard. The Code of Professional Conduct is available on the Institute's
website, www.payroll.ca.

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Content Review
• The primary objective of the payroll function in every organization is to pay
employees accurately and on time, in compliance with legislative requirements, for a
full annual payroll cycle.
• Payroll is the process of paying employees in exchange for the services they perform.
• Legislation refers to laws enacted by a legislative body.
• Compliance is the observance of official requirements.
• A payroll professional’s knowledge includes information on payroll compliance
legislation, payroll processes and reporting, and technical, personal and professional
skills.

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Payroll Stakeholders
Stakeholders are the individuals, groups and agencies, both internal and external to the
organization, who share an interest in the function and output of the payroll department.
Stakeholders can be considered customers of the payroll department, and payroll
professionals can take a proactive customer service approach to serve these individuals and
groups.

Payroll management stakeholders are the federal and provincial/territorial governments, the
internal and external stakeholders. Internal stakeholders include employees, employers and
other departments within the organization. External stakeholders include benefit carriers,
courts, unions, pension providers, charities, third party administrators, and
outsource/software vendors. The stakeholders of the payroll function are illustrated in
Diagram 1-2.

Diagram 1-2 – Payroll Management Stakeholders

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Government Stakeholders
Government legislation provides the rules and regulations that the payroll function must
administer concerning payments made to employees. For this reason, the payroll professional
must understand the scope and the source of payroll-related legislation.

Canada is ruled by a federal government with ten largely self-governing provinces and three
territories controlled by the federal government. Payroll professionals have to be compliant
not only with the federal government legislation but with the provincial and territorial
governments’ legislation as well.

As a result, payroll professionals and their organizations are affected by the enactment of
legislation at both the federal and provincial/territorial levels.

The federal parliament has the power to make laws for Canada's peace, order and good
government. The federal cabinet is responsible for most of the legislation introduced by
parliament and has the sole power to prepare and introduce tax legislation involving the
expenditure of public money.

The provincial/territorial legislatures have power over direct taxation in the province or
territory regarding natural resources, prisons (except for federal penitentiaries), charitable
institutions, hospitals (except marine hospitals), municipal institutions, education, licences
for provincial/territorial and municipal revenue purposes, local works, incorporation of
provincial/territorial organizations, the creation of courts and the administration of justice,
fines and penalties for breaking provincial/territorial laws.

Federal and provincial/territorial governments have power over agriculture, immigration and
certain aspects of natural resources. Should their laws conflict, federal law will prevail.

In the case of old age disability and survivor’s pensions, the federal and provincial/territorial
governments have power. In this instance, if their laws conflict, the provincial/territorial
power prevails.

The federal government cannot transfer any of its powers to a provincial/territorial

legislature, nor can a provincial/territorial legislature transfer any of its powers to the federal
government. The federal government can, however, delegate the administration of a federal
act to a provincial/territorial agency, and a provincial/territorial legislature can delegate the
administration of a provincial/territorial act to a federal agency.

Example:
As all provinces and territories (except Québec) have delegated the administration of the
collection of income tax deductions to the federal government, the Canada Revenue Agency
(CRA) collects income tax withheld from employees under both federal and
provincial/territorial requirements. Québec collects its provincial income tax directly.

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Federal Government
The Constitution Act of 1867 outlined the division of legislative power and authority between
federal and provincial/territorial jurisdictional governments. The exclusive legislative
authority of the Parliament of Canada extends to all matters regarding:

• regulation of trade and commerce

• Employment Insurance
• postal service
• fixing and providing salaries and allowances for civil and other officers of the
Government of Canada
• navigation and shipping
• ferries between a province and any British or foreign country or between two
provinces
• criminal law, except the Constitution of Courts of Criminal Jurisdiction, but including
the Procedure in Criminal Matters
• anything not specifically assigned to the provinces under this Act

The Canada Labour Code is legislation that consolidates certain statutes respecting labour.
Part I deals with Industrial Relations, Part II deals with Occupational Health and Safety, and
Part III deals with Labour Standards. The primary objective of Part III is to establish and
protect employees’ and employers’ rights to fair and equitable conditions of employment.
Part III provisions establish minimum requirements concerning the working conditions of
employees under federal jurisdiction in the following industries and organizations:

• industries and undertakings of inter-provincial/territorial, national, or international

nature, that is, transportation, communications, radio and television broadcasting,
banking, uranium mining, grain elevators, and flour and feed operations
• organizations whose operations have been declared for the general advantage of
Canada or two or more provinces, and such Crown corporations as Canada Post
Corporation and the Canadian Broadcasting Corporation (CBC)

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Provincial/Territorial Governments
Under the Constitution Act of 1867, the exclusive legislative authority of the provinces and
territories exists over:

• all laws regarding property and civil rights, which give the provinces/territories the
authority to enact legislation to establish employment standards for working
conditions
• employment in manufacturing, mining, construction, wholesale and retail trade,
service industries, local businesses and any industry or occupation not specifically
covered under federal jurisdiction

The existing divisions between federal and provincial/territorial control impact payroll when
dealing with employment/labour standards. Employment/labour standards are rules legislated
by each provincial/territorial jurisdiction that dictate issues such as hours of work, minimum
wage, overtime, vacation pay and termination pay requirements.

Example:
The Gap is a retail business with stores across Canada. The workers in each store are
governed under the employment/labour standards legislated in the jurisdiction in which they
work. For example, Ontario's minimum general hourly wage is higher than Prince Edward
Island's. An employee working in Ontario would receive a higher hourly minimum wage than
an employee with the same position in Prince Edward Island.

Employers must follow the employment/labour standards legislated by the jurisdiction where
their employees work unless they are governed by federal labour standards. Federal labour
standards apply to certain industries and organizations, regardless of where the employees
work.

The person or persons performing the payroll function must clearly understand under which
employment/labour standards jurisdiction the organization's employees fall. Organizations
may have some employees who fall under federal jurisdiction and another group of
employees who fall under provincial/territorial legislation.

Example:
Shipping and navigation employees, including dockworkers, oil rig workers, etc., fall entirely
within the federal jurisdiction. Only seamen working exclusively in one province/territory
would be under provincial/territorial jurisdiction.

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Legislative Changes
Federal and provincial/territorial legislation and amendments to existing legislation and
regulations can affect the operations of a payroll department, as the requirement to comply
with the new or amended legislation must be satisfied.

Legislation determines the rules, while regulations determine how the rules are to be applied.

Example:
The Income Tax Act
The legislation:Specifies that employers are required to withhold income tax from
employees.
The regulation: Specifies the taxation methods that should be used for non-periodic
payments such as bonuses, retroactive pay increases, lump-sum payments,
etc.

The federal government specifies the methods for calculating income tax deductions through
regulations.

Example:
Non-periodic bonus payments – Where an employer makes a payment in respect of a bonus
to an employee whose total remuneration (including the bonus) from the employer may
reasonably be expected to exceed $5,000 in the taxation year of the employee in which the
payment is made, the amount to be deducted or withheld by the employer is dictated through
a calculation prescribed in the regulation within the Act.

Legislative change can be anything but routine, particularly if the change is implemented at a
time other than at the beginning of a calendar year or involves some retroactivity. The change
may involve adjustments to individual payroll accounts and extra work for the payroll
department to finalize reconciliations and year-end balancing requirements.

In general, legislation, particularly labour legislation, is constantly being changed, amended,

repealed or revised. As a result, it is essential to keep up-to-date with the changes in the
jurisdiction(s) in which your organization operates.

Changes in legislation are generally publicized in the media. Human resources, tax
specialists, and corporate legal departments often provide this information in large
organizations. However, in both large and small organizations, the payroll professional
should be proactive in keeping abreast of changes and bringing them to the attention of those
involved. There are many ways to keep informed of changes that impact payroll.
The following are some of the resources available to the payroll professional:

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• The National Payroll Institute offers a phone and email information service, Payroll
InfoLine, for members’ payroll related questions. The Institute also has a website for
members, www.payroll.ca, that contains guidelines, legislative updates and other
useful payroll related information. As well the Institute is available on
Twitter(@cdnpayroll), LinkedIn (The National Payroll Institute) and Facebook
(@canadianpayroll),
• The Canada Revenue Agency (CRA) produces guides, publications, Income Tax
Bulletins, Folios and Circulars, posts news bulletins and enables participation on an
electronic mailing list with email alerts for new content to the Canada.ca website.
• The Revenu Québec (RQ) website provides guides, publications, bulletins, forms,
online services and enables participation on an electronic mailing list with email
notifications of tax news articles - https://www.revenuquebec.ca/en/
• Employment/labour standards (federal, provincial and territorial) publications and
websites. Each jurisdiction has a website providing information on its
employment/labour standards. For example, the websites for Alberta and Québec are:
Alberta – https://www.alberta.ca/employment-standards.aspx
Québec – https://www.cnesst.gouv.qc.ca/en
• Employment and Social Development Canada (ESDC) and Service Canada (SC)
publications, including information regarding the Employment Insurance (EI)
program and the Social Insurance Number – www.canada.ca
• CCH Canada Limited publishes a series of volumes on employment and labour law,
pensions and benefits, etc., that supplies information on legislation with regular
updates as changes become law – www.cch.ca

Copies of legislation are available through government websites and from the printing offices
of the federal, provincial and territorial governments.

Legislative Compliance
In addition to payroll’s primary role of paying employees accurately and on time, payroll
professionals are directly or indirectly responsible for supporting and ensuring compliance
with the requirements of various government acts. Where legislation requires employer
compliance (for example, remittance of payroll source deductions, Canada Pension Plan
contributions, Employment Insurance premiums, and federal and provincial/territorial
income tax deductions), there are financial penalties or the possibility of legal action to
encourage compliance.

Fines, penalties and interest charges are typically a result of audits and legal action. These
may result in the seizure of bank accounts or assets, fines of $1,000 to $25,000, and, in some
cases, jail sentences of up to 12 months.
The governmental departments and agencies responsible for administering legislation employ
a variety of systems for tracking compliance. Some systems, such as the monitoring of source
deduction remittances, are ongoing, with regimented reporting time frames that lay down a

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continual audit trail. Failure to meet the requirements of this legislation will incur a rapid
response that may result in fines and penalties.

Reporting requirements that do not involve ongoing, regular reporting may not impose an
immediate fine but may initiate a visit from an auditor or other official seeking compliance.

Example:
Record of Employment (ROE) issuance
Failure to issue an ROE within the established deadlines may result in a visit from an
investigative officer from Service Canada.

Some compliance systems operate quarterly or annually, and the observations raised by these
systems will result in requests for additional information or explanation and, in some cases, a
request for a supplementary payment or a fine.

Example:
The Canada Revenue Agency’s Pensionable and Insurable Earnings Review (PIER) is an
annual compliance review system. This system utilizes the data provided on the T4
information slips issued at year-end to validate the amounts of CPP contributions and EI
premiums deducted by employers and identifies any remittance deficiencies.

Payroll departments can establish internal controls to ensure all legislative requirements are
met promptly. A checklist can be maintained to ensure compliance, showing all payments
and reports due for the month and signed off by the individual responsible.

Self-Assessment
The federal and provincial/territorial tax systems are based on the principle of self-
assessment. Taxpayers and their agents, including employers, are responsible for calculating,
reporting and remitting their contributions and the amounts withheld within the prescribed
deadlines.

As administrators of the tax system, the Canada Revenue Agency (CRA) and Revenu Québec
(RQ) must ensure that each individual and organization is compliant and pays all of the
amounts owing.

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Both the CRA and RQ recognize that taxpayers and agents are entitled to plan their affairs so
that they pay only the amounts that are legally due. It is acceptable to take advantage of tax
rules to minimize the amount of taxes paid. It is not lawful, however, to evade taxes owed by
failing to report income, failing to remit taxes due or providing the CRA or RQ with false
information.

Internal Stakeholders
Internal stakeholders are individuals or departments closely related to the organization the
payroll department serves. This group includes employers, employees and other departments
in the organization.

Employers - Management may require certain information from payroll to make sound
business decisions.

Example:
Reporting the amount of overtime worked by a certain department may influence decisions
regarding staffing availability for upcoming projects and requirements for increased
resources.

Employees – Employees require that their pay is received in a timely and accurate manner to
meet personal obligations. Employees must also be assured that their personal information is
kept confidential.

Example:
Judy Smith, Payroll Manager of Blown Glass Inc., sent a memo to all employees on
December 3 stating that the pay cheques that normally would be issued on December 23
would be issued on December 20 this year so that all employees would receive their pay well
in advance of the Christmas break.

Any changes impacting an employee’s net pay should be communicated in advance for
personal planning purposes.

Example:
The payroll department of Macrosoft included a notice in the June 7 pay statements that
advised employees that an additional $5.00 would be deducted from their pay as of July 5
due to increases in the cost of dental plan insurance premiums.

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Other departments – Many departments interact with payroll, either for information or
reporting. Information such as general ledger posting, payroll and benefits costs and salary
information must flow between payroll, human resources and finance in formats needed for
their various requirements.

In addition, other departments, such as contracts and manufacturing, often need payroll
information for budgeting, analytical and quality purposes.

Example:
Changes to the rates for Canada Pension Plan (CPP) contributions and Employment
Insurance (EI) premiums will affect departmental expenses and should be communicated to
those responsible for the budget process.

External Stakeholders
External stakeholders are organizations that are neither government nor internal stakeholders
yet have a close working relationship with the payroll function. Compliance with external
stakeholder requirements is also a responsibility of the payroll department. In most cases,
compliance will require that payroll request a cheque from accounts payable and send it to
the external organization along with supporting documentation.

Benefit Carriers are insurance companies that provide benefit coverage to employees.
Payroll is responsible for deducting and remitting premiums for the insurance coverage to the
carriers and providing reports on employee enrolment and coverage levels.

Example:
Blossom Packaging provides its employees with group insurance coverage through
Consensus Insurance Co. Blossom Packaging remits, every month, the employee and
employer premiums and a listing of current employees covered under the plan with the
amount of their coverage.

Courts and the CRA require payroll to deduct accurately and remit amounts ordered to be
withheld through garnishments, third party demands, requirements to pay and support
deduction orders.

Example:
Astor Resorts, an Ontario employer, is required to withhold 30% of James Robinson’s net
pay under a Support Deduction Order issued by the court. According to the terms and
schedule of the order, the organization remits this withholding to the Family Responsibility
Office.

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Unions require that payroll accurately deduct and remit union dues and initiation fees and
ensure that the terms of the collective agreement are followed. It is estimated that just under
one-third of the workforce in Canada belongs to a trade union. Payroll professionals must be
familiar with the role and activities of trade unions and the responsibilities of the employer
and the payroll department in a unionized environment.

Trade unions negotiate with the employer, through collective bargaining, the wages, benefits,
allowances and other terms and conditions of employment on behalf of their member
employees. The outcome of negotiations is a collective agreement, a legally binding contract
between the employer, the union and the employees.

Example:
Mesa Manufacturing must withhold $10.00 per pay for union dues from every employee who
is a member of the union, as required under the collective bargaining agreement (CBA). The
organization withholds the dues and remits them to the union according to the schedule in the
CBA.

Pension Providers are third party pension plan providers that may require payroll to provide
enrolment reports on participating employees and length of service calculations and to remit
employee deductions and employer contributions.

Example:
Velars Corp. contributes an amount equal to 5% of each employee’s earnings to the
organization’s registered pension plan. Each month, payroll prepares a list of employees
enrolled in the plan, their eligible earnings and the organization’s 5% contribution. The
detailed list is sent to the pension plan administrator, along with payment for the
contributions to be allocated to each member's account.

Charities have arrangements with some organizations to facilitate employee donations

through payroll deductions. Payroll is responsible for remitting these deductions to the
charity.

Example:
A common charitable donation facilitated by payroll is to United Way/Centraide. Employees
will sign up to donate a certain contribution per pay, and payroll will withhold and remit the
contributions to the registered charitable organization regularly.

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Third Party Administrators are organizations that affect the administration of the payroll
function. Examples of these external stakeholders are banking institutions or benefit
organizations that offer Group Registered Retirement Saving Plans (RRSP). Payroll is
responsible for deducting employee contributions and remitting employer and employee
contributions to the plan administrator.

Example:
Legrand Industries offers a group RRSP to employees, with contributions made through
payroll deductions. Employees sign up to contribute a certain amount or percentage of their
earnings per pay, and payroll will withhold and regularly remit the contributions to the plan
administrator, according to the plan document.

Outsource/Software vendors are payroll service providers or payroll software vendors that
work with the payroll department to ensure the payroll is being processed accurately and
efficiently.

Example:
Martel Box has hired an external service provider to process its payroll. Martel Box is still
responsible for ensuring all earnings and deductions are calculated correctly and in
compliance with government legislation.

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Content Review
• Stakeholders are the individuals, groups and agencies, both internal and external to
the organization, who share an interest in the function and output of the payroll
department.
• Payroll management stakeholders are the federal and provincial/territorial
governments, the internal stakeholders, and the external stakeholders.
• Internal stakeholders include employees, employers and other departments within the
organization.
• External stakeholders include benefit carriers, courts, unions, pension providers,
charities, third party administrators, and outsource/software vendors.
• The federal parliament has the power to make laws for the peace, order and good
government of Canada.
• The provincial/territorial legislatures have power over direct taxation in the
province/territory for provincial/territorial purposes.
• Federal control exists over industries and undertakings of inter-provincial/territorial,
national, or international nature and organizations whose operations have been
declared for the general advantage of Canada or two or more provinces and Crown
corporations.
• Provincial/territorial legislation exists with laws regarding property and civil rights
and employment in manufacturing, mining, construction, wholesale and retail trade,
service industries, local businesses and any industry or occupation not specifically
covered under federal jurisdiction.
• Employers must follow the employment/labour standards legislated by the
jurisdiction where their employees work unless they are governed by federal labour
standards.
• Where legislation requires employer compliance, there are financial penalties or the
possibility of legal action to encourage compliance.

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The Employee-Employer Relationship

In all situations, it is necessary to establish whether the relationship between the worker and
the organization is one of an employee and an employer or if the worker is self-employed.
This relationship determines the requirement for statutory withholdings and the requirement
for compliance with related legislation. The Canada Revenue Agency (CRA) has established
factors to assist in determining whether or not this relationship exists. It is not up to the
worker to decide whether or not they are an employee, subject to statutory withholdings.

Payroll can take a proactive role in communicating the importance of determining the
existence of the employee-employer relationship to all areas of the organization.

When an employee-employer relationship exists, payroll has a compliance responsibility

related to statutory withholdings, which requires that all employees have the appropriate
statutory deductions withheld from their pay and remitted to the government.

Where an employee-employer relationship exists, the CRA requires the employer to:

• register with the Canada Revenue Agency for a Business Number (BN)
• withhold the statutory deductions of income tax, Canada Pension Plan (CPP)
contributions, and Employment Insurance (EI) premiums on amounts paid to
employees
• remit the amounts withheld as well as the required employer's share of CPP
contributions and EI premiums to the Canada Revenue Agency
• report the employees' income and deductions on the appropriate information return
• give the employees copies of their T4 slips by the end of February of the following
calendar year

Information on the factors to consider when determining whether an employee-employer

relationship exists can be found in the Canada Revenue Agency guide, Employee or Self –
Employed? – RC4110. The guide is available on the CRA’s website,
https://www.canada.ca/en/revenue-agency.html.

The factors used by the Canada Revenue Agency and Revenu Québec to determine whether
an employee-employer relationship exists in Québec will be discussed in a later chapter.

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Contract of Service
A contract of service is an arrangement whereby an individual (the employee) agrees to
work on a full-time or part-time basis for an employer for a specified or indeterminate period.

Under a contract of service, one party serves another in return for a salary or some other form
of remuneration.

Example:
Aurora Green has accepted an employment offer from Diesen Electronics for the role of HR
Administrator, reporting to the Director of Human Resources. Aurora will work a standard
37.5 hour week, receive an annual salary of $48,000 and will be eligible to participate in the
company benefits and pension plan.

Contract for Service

A contract for service is a business relationship whereby one party agrees to perform certain
specific work stipulated in the contract for another party. It usually calls for the
accomplishment of a clearly defined task but does not normally require that the contracting
party do anything themself. A person who carries out a contract for service may be
considered a contract worker, a self-employed person or an independent contractor.

Example:
Diesen Electronics is located in the Greenbank Business Park area of Swift Rapids. The
company has a parking lot and green space surrounding the building. Diesen has contracted
Frank Oxford to do landscaping work and snow removal when required. Frank has a team of
six workers who perform the work at various client sites. Frank has a contract for service
with Diesen.

A business relationship is a verbal or written agreement in which a self-employed individual

agrees to perform specific work for a payer in return for payment. There is no employer or
employee. The self-employed individual generally does not have to carry out all or even part
of the work themself. In this type of business relationship, a contract for services exists.

The self-employed individual is required to produce a given result within a period in the
manner they deem most appropriate. While performing the work, they are not under the
orders or control of the person to whom the work is being provided, and they can use their
own initiative in matters that are not specified or determined at the outset. The payer is not
normally involved in the performance of the work and, therefore, has no control over it.

Under a contract for service, a self-employed individual assumes the chance of profit and risk
of loss. By agreeing, before they are engaged, to establish the overall cost of the work to be
done, providing their own tools and instruments and being solely responsible for how the

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work is done, the self-employed individual assumes all risk of loss resulting from events that
occur during the work which were not or could not, be foreseen when the contract was
negotiated. If, on the other hand, the work is completed sooner or more easily than expected,
the contractor's profit will be greater.

A contract for service is often used when an organization wishes to have work performed that
does not fall within its usual scope of operations. The relationship between a payer and a
self-employed individual and that between an employer and their employees are sometimes
quite similar. The main difference between the two relationships is that, in a contract for
service, the party paying for the service is entitled to dictate what is to be done or what result
is to be achieved, whereas, in a contract of service, the employer is also entitled to stipulate
how the work is to be done.

Under a contract for service, the person for whom the work is being done exercises general
supervision. They can and should see that the work is completed as per the agreement, but it
is not up to them to give orders to the self-employed individual regarding how the work is to
be done. The mere fact that a self-employed individual receives general instructions from the
project manager concerning the work to be done does not mean that they can be considered
an employee.

An employee-employer relationship is deemed to exist where the organization exercises, or

has the right to exercise, direct control over the individual. If the organization is unsure as to
whether or not a relationship exists, the Canada Revenue Agency (CRA) form Request for a
CPP/EI Ruling – Employee or Self-Employed? – CPT1 should be submitted to the CRA. A
sample of the CPT1 form is provided at the end of this section.

Independent contractors or self-employed individuals are not considered employees of the

organization, provided no employee-employer relationship exists. Persons who are self-
employed individuals will submit invoices and be paid through accounts payable. However,
the submission of an invoice to accounts payable is not sufficient to determine if the
individual is self-employed.

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Factors used to determine the type of contract

The CRA uses a two-step approach to examine the relationship between the worker and the
payer for relationships outside the province of Québec. The approach used for relationships
in the province of Québec will be discussed in a later chapter.

Step 1:
The first step is to establish what the intent was when the worker and the payer entered into
the working arrangement. Did they intend to enter into an employee-employer relationship
(contract of service), or did they intend to enter into a business relationship (contract for
service)? The CRA must determine not only how the working relationship has been defined
but why it was defined that way.

Step 2:
The CRA then considers certain factors when determining if a contract of service or a
contract for service exists. To understand the working relationship and verify that the intent
of the worker and the payer is reflected in the facts, they will ask a series of questions that
relate to the following factors:

• the level of control the payer has over the worker

• whether or not the worker provides the tools and equipment
• whether the worker can subcontract the work or hire assistants
• the degree of financial risk taken by the worker
• the degree of responsibility for investment and management held by the worker
• the worker’s opportunity for profit
• any other relevant factors, such as written contracts

The CRA will look at the answers independently and then together and consider whether or
not they reflect the intent that was originally stated. Considered individually, the response to
each of these questions is not conclusive; however, when weighed together, certain
conclusions may be drawn. When there is no common intent, the CRA will decide if the
answers are more consistent with a contract of service or a contract for service.

Each of these factors will be discussed in the material, and indicators showing whether the
worker is an employee or self-employed will be provided.

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Control
The ability, authority or right to exercise control over a worker concerning how the work is
done and what work is done is one of the factors considered, as is the degree of independence
held by the worker. Both the payer’s control over the worker’s daily activities and the payer’s
influence over the worker will be examined. The relevant factor is the payer’s right to
exercise control. Whether or not the payer exercises this right is irrelevant.

INDICATORS THAT THE

INDICATORS THAT THE
FACTOR WORKER IS A SELF-
WORKER IS AN EMPLOYEE
EMPLOYED INDIVIDUAL
Control • The relationship is one of • The individual usually works
subordination. independently and does not have
• The payer will often direct, anyone overseeing them.
scrutinize, and effectively • The worker is usually free to work
control many elements of when and for whom they choose
how the work is performed. and may provide their services to
• The payer controls both the different payers at the same time.
results of the work and the • The worker can accept or refuse
method used to do the work. work from the payer.
• The payer determines what • The working relationship between
jobs the worker will do. the payer and the worker does not
• The worker receives training present a degree of continuity,
or direction from the payer on loyalty, security, subordination, or
how to do the work. integration.

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Tools and Equipment

Ownership of tools and equipment is not, in itself, a determining factor relating to
establishing the type of contract in effect. The fact that workers use their own equipment
when performing their work is not sufficient to conclude that they are self-employed.
Self-employed individuals often supply the tools and equipment necessary to complete a
contract, making their ownership commonly associated with a business relationship;
however, employees can also be required to provide their own tools.

In an employee-employer relationship, the employer generally supplies the equipment and

tools required by the employee. In addition, the employer covers the following costs related
to their use: repairs, insurance, transport, rental and operation (for example, fuel).

In some trades, however, it is normal for employees to supply their own tools. This is
generally the case for auto mechanics, painters and carpenters. Similarly, employed computer
scientists, architects and surveyors sometimes supply their own software and instruments.

In a business relationship, workers generally supply their own equipment and tools and cover
costs related to their use. When workers purchase or rent equipment or large tools that
require a major investment and costly maintenance, it usually indicates that they are self-
employed individuals, as they may incur a financial loss when replacing or repairing their
equipment.

The relevance of the ownership of tools and equipment is in the size of the investment along
with the cost of repair, replacement and insurance.

INDICATORS THAT THE

INDICATORS THAT THE
FACTOR WORKER IS A SELF-
WORKER IS AN EMPLOYEE
EMPLOYED INDIVIDUAL
Tools and • The payer supplies most of • The worker provides the tools
equipment the tools and equipment. and equipment required and, is
• The payer retains the right of responsible for the cost of
use over the tools and repairs, insurance and
equipment provided to the maintenance, and retains the
worker. right over the use of these assets.
• The worker supplies the tools • The worker supplies their own
and equipment, and the payer workspace, is responsible for the
reimburses the worker for costs to maintain it, and does
their use. substantial work from that site.

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Subcontracting Work or Hiring Assistants

As subcontracting work or hiring assistants can affect a worker’s chance of profit or risk of
loss, this can help determine the type of business relationship.

INDICATORS THAT THE INDICATORS THAT THE

FACTOR WORKER IS AN WORKER IS A SELF-
EMPLOYEE EMPLOYED INDIVIDUAL
Subcontracting • The worker cannot hire • The worker does not have to
work or hiring helpers or assistants. perform the service personally;
assistants • The worker must perform the they can hire another party to
services personally. complete the work without
consulting with the payer.

Financial Risk
The CRA will examine if there are any fixed ongoing costs incurred by the worker or any
expenses that are not reimbursed. Employers will usually reimburse employees for any
expenses incurred in the performance of their job. Self-employed individuals can have
financial risk and incur losses as they usually have ongoing monthly expenses whether or not
work is being performed. Both employees and self-employed individuals may be reimbursed
for business or travel expenses; however, it is the expenses that are not reimbursed that are
examined.

INDICATORS THAT THE

INDICATORS THAT THE
FACTOR WORKER IS A SELF-
WORKER IS AN EMPLOYEE
EMPLOYED INDIVIDUAL
Financial risk • The worker is not usually • The worker is financially liable if
responsible for any operating they do not fulfill the obligations
expenses. of the contract.
• The worker is not financially • The worker does not receive any
liable if they do not fulfill the protection or benefits from the
obligations of the contract. payer.
• The payer determines and • The worker hires helpers to assist
controls the method and and pays them.
amount of pay. • The worker advertises the
services offered.

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Responsibility for Investment and Management

If the worker is required to make an investment to provide the services, this is evidence that a
business relationship may exist. Another factor indicating the existence of a contract for
service is if the worker is responsible for making business decisions that affect their profits or
losses.

INDICATORS THAT THE INDICATORS THAT THE

FACTOR WORKER IS AN WORKER IS A SELF-
EMPLOYEE EMPLOYED INDIVIDUAL
Responsibility • The worker has no capital • The worker has capital
for investment investment in the business. investment, manages their staff,
and • The worker does not have a hires and pays individuals to help
management business presence. perform the work, and has
established a business presence.

Opportunity for Profit

A business relationship likely exists where the worker can realize a profit or incur a loss, as
this indicates the worker controls the business aspects of the services rendered. Self-
employed individuals can accept contracts as they wish. They can negotiate the rate for their
work and can accept more than one contract at the same time. To carry out the terms and
conditions of their contract, they often incur expenses which they must manage to increase
their profit.

Employees normally do not have a chance of profit or a risk of loss. While some employees
who are paid by commission have an opportunity to increase their earnings based on their
sales, this is not a profit as it is not an excess of income over expenses. As well, employees
generally do not share in profits or suffer losses incurred by the business that employs them.

The CRA will look at the degree to which the worker can control their revenues and
expenses. They will also look at the method of payment. Employees are typically guaranteed
their earnings according to an established rate (hourly, daily, weekly, annual) and pay
frequency. While self-employed individuals may be paid on an hourly basis, if they are paid
a flat-rate for the work performed, it generally indicates a business relationship, especially if
they incur expenses while performing the services.

INDICATORS THAT THE

INDICATORS THAT THE
FACTOR WORKER IS A SELF-
WORKER IS AN EMPLOYEE
EMPLOYED INDIVIDUAL
Opportunity • The worker is not in a position to • The worker is compensated by
for profit realize a business profit or loss. a flat fee.
• The worker is entitled to benefit • The worker can hire and pay a
plans that are normally only substitute.
offered to employees.

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Content Review
• A contract of service is an arrangement whereby an individual (the employee) agrees
to work on a full-time or part-time basis for an employer for a specified or
indeterminate period.
• A contract for service is a business relationship whereby one party agrees to perform
certain specific work stipulated in the contract for another party.
• The CRA uses a two-step approach to examine the relationship between the worker
and the payer for relationships outside the province of Québec.
• The ability, authority or right to exercise control over a worker concerning how the
work is done and what work is done is one of the factors considered, as is the degree
of independence held by the worker. The relevant factor is the payer’s right to
exercise control.
• The relevance of the ownership of tools and equipment is in the size of the investment
along with the cost of repair, replacement and insurance.
• The CRA will examine if there are any fixed ongoing costs incurred by the worker or
any expenses that are not reimbursed.
• The CRA will look at the degree to which the worker can control their revenue and
expenses.

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Common Situations
Throughout your career in payroll, you will likely experience some very common situations.
Being prepared to respond to an employee or a manager confidently demonstrates your
competence.

Over time, you will be able to elevate yourself within the organization by building people’s
trust in you when you demonstrate you are knowledgeable and have a practical
understanding of how to handle situations in a compliant manner that also considers the best
interest of your stakeholders.

Consider how you would respond to the following situation.

----------------------------------------------------------------------------------------------------------------

Your organization has recently undergone a CRA audit, and an issue identified was an
incorrect assessment of the employee-employer relationship for Maria Alverz.

Maria was initially retained to provide consulting services during a system implementation.
As a software solutions specialist, Maria established a client base to whom these services
were provided.

The implementation was a six-month project for which Maria was paid a fixed fee for
services. Maria outsourced some aspects of the project to other professionals who were paid
directly by Maria.

When Maria was initially contracted, it was determined that the role was that of an
independent contractor who invoiced the organization for their fees.

After the implementation, the organization decided to add a new position, Business Analyst,
reporting directly to the Director of Business Intelligence, who monitors performance
objectives and attendance.

Maria accepted the job offer of this role and signed a new contract that provides a base salary
and an annual vacation. The new contract also included eligibility to join the organization’s
benefits plan and participation in the bonus program based on performance. Maria’s standard
working hours will be 40 per week.

Although a new contract was entered into, Maria continued to invoice the organization for
remuneration instead of being moved to the organization’s payroll.

As a payroll professional, what steps should you take to avoid unnecessary fines and
penalties associated with incorrectly identifying an employee-employer relationship?

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[SUGGESTED BEST PRACTICE]

Incorrectly identifying an employee-employer relationship, or change in a relationship, is one
of the most common employer compliance audit issues identified by the Canada Revenue
Agency (CRA).

An employer who fails to deduct the required CPP contributions or EI premiums must pay
the employer's and the employee's share of any contributions and premiums owing. Penalties
and interest may also be charged for failure to withhold and remit.

Before an organization agrees to pay an individual as an independent contractor, a thorough

review of the situation should be completed by a payroll professional or another individual
familiar with the CRA criteria for employment relationships.

It is also important to revisit these situations to reassess. Often, as seen in the case of Maria,
the relationship can change. A regular review of individuals being paid as independent
contractors should be conducted to identify individuals who should be moved to payroll.

The terms and conditions detailed in the most current contract or working relationship, along
with the criteria detailed in guide RC4110 available from the CRA, should be used to assess
the situation.

Sometimes, individuals who have operated as independent contractors resist the idea that
they are now employees. It is important to remember that the fact that they previously had
their own business is not a criterion used to determine the current relationship. The facts of
each working relationship must be reviewed independently.

When the individual disputes the assessment and recommendation, the next step is to request
a ruling from the CRA by completing Form CPT1 Request for a CPP/EI Ruling – Employee
or Self-employed? This will confirm the organization’s position that the individual is an
employee. This will ensure that unnecessary fines and penalties for an incorrect assessment
of the employment relationship are avoided.

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