Payroll Journal Entry in Canada: CPP, EI, Tax and the Remittance

What goes into a payroll journal entry in Canada?

Book each pay run as two entries. Entry 1 is the employee's pay: gross pay is the expense, and the CPP, EI and income tax taken out of it are money you owe the CRA. Entry 2 is the employer's own CPP and EI: another expense, and more money owed. The CRA says an employer must calculate the CPP contributions, EI premiums and income tax to deduct from pay, and also calculate its own share of CPP and EI.

Two rules keep the accounts honest:

• Withheld from the employee is a liability, not an expense. Wages expense already contains it.
• The employer's share is an expense, and a liability until remitted.

A payable is money you owe and have not paid yet. In the tables below, a debit is the left column and a credit the right.

Net pay is the only part that leaves the bank on payday. The CRA is paid later, in one remittance.

The CRA says every amount you deduct is held in trust for the government. If a corporation does not remit it, its directors at the time can be personally liable with it (Income Tax Act, s. 227.1; CPP and EI follow the same rule), and no action against a director can start more than two years after the director last ceased to be a director. See late payroll remittance.

A pay run is not simple when it is your first payroll, when your payroll payables do not match what the CRA shows for your account, when your accountant wants payroll tied to the remittances and T4s before the T2, when a remittance was missed, when an employee works in Quebec, or when the only employee is the owner. If the books and the CRA disagree, posting one more run will not fix it: each period has to be traced from the pay records to the CRA account. Gather the pay stubs or payroll register for each run, the remittance receipts or bank debits, the CRA payroll statements, and the T4 slips and summary.

What does the employer add: CPP and EI?

The employer pays CPP equal to the CPP deducted from the employee, and EI at 1.4 times the employee's EI premium. The Employers' Guide says an employer must contribute an amount equal to the CPP it deducts, and 1.4 times the EI premiums it deducts; the EI multiple can be lower under a short-term disability plan. The EI page says to remit the total of both amounts.

Sources: CPP, CPP2 and EI. Deductions stop for the year once the yearly maximum is reached.

Not every employee has every line. Per the Employers' Guide, CPP is not deducted from an employee under 18, after the month the employee turns 70, from one aged 65 to 69 who has given you Form CPT30, or from one considered disabled under the CPP. A person who controls more than 40% of a corporation's voting shares is not in insurable employment, and the job of a related person may not be either (Employment Insurance Act, s. 5), so no EI. Leave those lines out of the entry for that person. For the owner's own pay, see owner-only payroll; for a spouse or child, see paying family members.

What does a payroll journal entry look like for one pay run?

Net pay is gross pay less the three withholdings and any other deduction on the pay stub, such as a benefit premium, union dues or a garnishment. This table shows only the three the CRA remittance covers; give each other deduction a payable of its own, cleared when you pay the third party. Vacation pay is part of gross pay. Account names are bookkeeping practice; what matters is that CPP, EI and income tax each have their own payable, so each ties to a line on the CRA's T4 Summary.

Payroll software that posts this for you uses the accounts you mapped to it. Check that mapping against the table before the first pay run. Never debit expense again for the employee's withholdings.

How do I record the remittance to the CRA?

Record the remittance as a payment against the payables: debit CPP payable, EI payable and income tax payable, and credit the bank. No expense is booked here, because both expenses were booked at the pay run.

If a payroll service takes the pay and the CRA amounts from your bank, post from its pay-run report, not from the bank lines. A bank debit to the service is not proof the CRA was paid; confirm the payment on your CRA account.

One payment covers both shares plus the tax withheld. On the PD7A voucher, the amount paid is the total CPP and EI, employer and employee shares, and income tax. The CRA dates a payment by how it was paid: the date the bank credits the CRA for online or telephone banking, the date stamped on the voucher at a bank counter, or the date the CRA receives a payment by mail. Date the entry to your bank payment, and compare it with the CRA's posting, which can fall on a different day.

Keep three things out of the payroll payables:

• Interest and penalties. Book them in their own accounts; see CRA reassessments and penalties.
• A payment on a CRA assessment. The CRA says to keep it separate from your source deductions.
• A remitting error. Per the Employers' Guide, remit a shortage as soon as possible; if you over-remitted, reduce your next remittance by the overpayment. An over-remittance leaves a debit balance in the payable until that next, smaller remittance.

For how to open the account and pay, see running payroll.

What is the PD7A, and can I run it from my accounting software?

The PD7A is the CRA's statement of account for current source deductions, with a remittance voucher. It is a CRA document, not a report your accounting or payroll software produces. The CRA lists it for regular and quarterly remitters, with a PD7A(TM) for accelerated remitters.

Per the Employers' Guide, the statement part shows the account number, the date issued and the remittance account balance for the year. The account summary lists transactions posted since the last statement. The CRA stops mailing a paper PD7A once you have paid electronically for six consecutive remittances or more; the same information is in My Business Account under "View account transactions" and "View account balance".

Software can print its own payroll summary or liability report. Use it to prepare the remittance, then compare it with the CRA's statement.

When is the remittance due, and how does it change the liability balance?

The due date depends on the remitter type, and it decides how much stays in the payables between payments. The CRA due dates are:

A due date on a weekend or CRA holiday is met if the CRA receives the payment, or a Canadian financial institution processes it, on or before the next business day. Quarterly remitting needs a small payroll and a perfect compliance record; the tests are on the CRA's when to remit page.

The CRA sets your remitter type, generally from average monthly withholding two calendar years back, so it can change as payroll grows. Confirm yours on the CRA account instead of estimating it. Pay made in late December and remitted on January 15 is still a December payable at year end. A payable older than its due date is a red flag; for a late remittance see late payroll remittance.

Which payroll costs sit outside the federal entry?

Provincial payroll taxes and workers' compensation are separate expense lines, owed to the province and not part of the CRA remittance. Give each its own expense and payable account.

This page covers Ontario and British Columbia only. Manitoba and Newfoundland and Labrador also have a payroll tax on employers, and the Northwest Territories has one levied on employees. Check your own province or territory.

How do I tie the books to the CRA payroll account and the T4 totals?

Tie the books twice: each month to the CRA's account, and each year to the T4 Summary.

Each month, compare every remittance in the books with the CRA's posted transactions. What remains in the three payables should be only the deductions for pay runs not yet due. Right after a due date, they should be zero apart from those pay runs.

At year end, the T4 Summary lines map to the payables:

Line 80 minus line 82 is the difference. Generally, the CRA does not charge or refund a difference of $2 or less. Box 14 is income before deductions and may include more than the wage lines in the pay register, so gross wages in the books can differ from it. A T4 also counts pay in the year it is paid: the CRA's T4 guide says income is reported for the year in which it is paid, regardless of when it was earned. Wages earned in December and paid in January are December expense in accrual books but belong on next year's T4, so compare the T4 totals with pay-date totals, not with expense for the year.

When the books do not tie, look for one of these:

For the T4 slip itself, see which slip to give a worker. For the year-end clean-up before the T2, see the year-end checklist for a corporation.

What changes in Quebec?

For an employee whose province of employment is Quebec, the entry has different lines and two agencies. The CRA says to deduct QPP instead of CPP, EI at the Quebec rate, QPIP premiums, and Quebec income tax remitted to Revenu Québec. The Quebec EI rate is 1.30%, against 1.63% elsewhere. Quebec income tax goes on the RL-1, not the T4.

A place of business in Quebec can also mean remitting to Revenu Québec as well as the CRA. The payables, the remittances and the year-end tie-out then split between two agencies, so the table above does not carry over as written.

Example

These examples use Canadian dollars and figures rounded to whole dollars for illustration only. Real deductions come from your payroll calculation for each pay period.

Ontario corporation, one employee, one month

An employee earns C$5,000 gross. Withheld: CPP C$280, EI C$82, income tax C$800, so net pay is C$3,838. The employer adds CPP C$280 and EI C$114 (1.4 times the unrounded employee premium of C$81.50 is C$114.10).

The payables reach C$560, C$196 and C$800, and the remittance of C$1,556 clears all three. The payroll costs the corporation C$5,394. In this example payroll is far below the Ontario exemption, so no employer health tax is booked.

British Columbia sole proprietor with a part-time helper

A helper is paid C$1,000 a month. Each month withholds CPP C$42 and EI C$16 (1.63% of C$1,000 is C$16.30). Pay this low would have little or no income tax withheld on a basic TD1 claim; here the helper asked on the TD1 for C$40 of extra tax from each payment. The employer adds CPP C$42 and EI C$23 (1.4 times C$16.30 is C$22.82). Each month adds C$163 to the payables. The business is a quarterly remitter, so nothing is paid until April 15 for January to March.

The C$489 remittance splits as CPP C$252, EI C$117 and tax C$120. A balance left after that payment points to something booked wrongly or a timing difference; compare it with the CRA's posting. In this example the helper's pay is far below the B.C. exemption, so no employer health tax is booked.

C$1,100 too much in CPP payable

A corporation pays once a month and remits monthly, and its first pay run was in January. Each pay run credits CPP payable C$100 (C$50 from the employee, C$50 from the employer). Each of the eleven remittances made by December 31 was coded to payroll expense instead of CPP payable. At year end CPP payable shows C$1,200, but only December's C$100 is still owed, so the payable and the expense are each C$1,100 too high.

In this example the fix is one entry in the current year: debit CPP payable C$1,100 and credit payroll expense C$1,100. From then on, code the remittance against the payable. If the error sits in a year already filed, do not credit the current year's payroll expense. That year's expense was counted twice, so its taxable income was too low and its return may need a change request; see correcting last year's financial statements.

Different for you?

• Your payroll liabilities do not match the CRA's balance, or the books and the T4 totals differ: finding which pay runs and remittances differ, whether penalties or interest apply, and how to set the entry up so it ties each period takes the CRA account, the pay records and the books side by side. See bookkeeping help.
• Your accountant wants payroll reconciled to the remittances and T4s before the T2: use the year-end checklist and get bookkeeping help if the numbers will not reconcile.
• It is your first payroll, or you are unsure the software's account mapping matches the table above: a wrong mapping posts every run wrongly. See bookkeeping help.
• Payroll was never booked for earlier pay runs or years, or an error sits in a year already filed: the payables and the CRA balance can both be wrong, and a correction changes that year's statements and can change the return filed for it. See correcting last year's financial statements or bookkeeping help.
• A remittance was missed or late: see late payroll remittance and record any penalty as in CRA reassessments and penalties.
• You received a payroll notice or examination: see payroll audits and worker status rulings.
• You are a sole proprietor or partner: the CRA says salaries or drawings paid to you or your partners are not deductible, so your own draws do not go through payroll; see sole proprietor drawings.
• You are the only employee: see owner-only payroll; for dividends instead of salary, see recording dividends.
• An employee works in Quebec: the entry differs; take it to bookkeeping help.
• You have a US business as well: see payroll journal entries in the US.