Glossary
Canadian Payroll Compliance
Canadian payroll compliance means paying people correctly, withholding the right source deductions, remitting them to the CRA on schedule, and filing the year-end and event-driven forms that go with employment. It is the most unforgiving part of the accounting calendar, because the deadlines are fixed and the penalties are automatic. At Treewalk we run payroll for Canadian and US employees, and we also test it on every diligence engagement, which is where the errors tend to surface.
What compliance actually covers
The recurring obligations are the ones that catch people out, because they never pause:
- Source deductions. Income tax, Canada Pension Plan and Employment Insurance withheld from each pay run.
- Employer contributions. The employer share of CPP and EI, which is a real cost on top of gross wages.
- Remittances. Sent to the CRA on a schedule set by your remitter type, which is based on your average monthly withholding amount. Remitter frequency can change as you grow, and missing that change is a common trigger for penalties.
- Records of Employment. Filed when an employee has an interruption of earnings, on a tight deadline, and one of the most commonly late filings we see.
- T4 and T4A slips. Filed annually with the CRA and given to employees, along with the T4 Summary reconciling what was withheld to what was remitted.
- Provincial obligations. Workers’ compensation premiums and, in several provinces, employer health tax. These sit outside the CRA cycle and are easy to forget.
Payroll for US employees runs a separate track entirely, with its own W-2, 1099 and state-level obligations. Businesses with staff on both sides of the border are effectively running two compliance calendars.
Where payroll goes wrong
Almost none of the problems we find are deliberate. They are structural, and they cluster.
Contractor misclassification
Treating someone as a contractor who functions as an employee is the single most expensive payroll error available. It creates unremitted source deductions, employer contributions, and interest going back years. We have seen this drive deal structure decisions on its own, with a buyer choosing an asset purchase specifically to avoid assuming the exposure.
The payroll ledger does not match the payroll provider
This one is routine, and the direction of the difference tells you a lot. When we reconcile, we take a date at random, pull the provider’s report for that period, and tie it to the salary expenses in the general ledger. A general ledger that is slightly higher than the provider report is usually benign, typically because workers’ compensation or a benefit sits in the internal accounts but not in the payroll file. A provider report that is higher than the ledger is the one worth chasing, because it suggests payroll cost that never made it into the books.
Double runs during a system change
We reviewed a business that had an old and a new payroll system running simultaneously for one month during a migration. The result was a month of payroll booked at close to double its real cost. It was only caught by going to the bank statements and confirming what actually left the account, and it mattered beyond that month, because the inflated figure fell inside the trailing twelve month period being used to price the deal. If you are changing payroll systems, read ERP and accounting system migration first.
Nobody reconciles the T4 Summary
The annual summary should tie to what was actually remitted across the year. Where it does not, the gap has usually been sitting there for months.
How we test it
| Check | What it proves |
|---|---|
| Provider report tied to the general ledger | The books reflect what was actually paid |
| Payroll tied to bank statements | The payroll actually left the account |
| Remittance history against the filing calendar | Nothing was late or missed |
| T4 Summary reconciled to remittances | The year closes cleanly |
| Contractor list reviewed against how people work | No hidden employment relationship |
| Accrued vacation and bonuses | Real liabilities are on the balance sheet |
We treat payroll as a data integrity exercise rather than a review of the payroll file alone. The point is to tie the financial statements to an external source, so we know the numbers are representative of how the business actually runs rather than simply internally consistent.
Why this matters more than it looks
For an owner running a stable business, payroll compliance is a monthly discipline and little more. It becomes material at three moments.
Selling, because unremitted payroll and misclassified contractors are unrecorded liabilities and they will be found. Borrowing, because payroll is usually the largest single cost line and a lender wants to know it is real. And growing, because remitter frequency, provincial thresholds and employment standards obligations all shift as headcount rises, quietly, without anyone sending a notice.
Frequently asked questions
How often do we have to remit source deductions?
It depends on your remitter type, which the CRA sets from your average monthly withholding amount. Smaller employers typically remit monthly, and larger ones more frequently. The trap is that your category can change as payroll grows, so the schedule you set up on day one may not be the one you are on now.
What happens if a remittance is late?
Penalties apply on the amount, and they escalate with repeat lateness, plus interest. Because it is formulaic rather than discretionary, this is one of the cheapest compliance risks to eliminate simply by not being late.
Are we allowed to pay someone as a contractor?
Only if the relationship genuinely is one. The tests look at control, ownership of tools, chance of profit and risk of loss, and integration into the business, not at what the invoice says. Where the reality looks like employment, the CRA will treat it that way regardless of any agreement.
Do we need to file an ROE if someone quits?
Yes. A Record of Employment is required on any interruption of earnings, including a quit, not just a termination or layoff. The deadline is short and this is one of the filings most often missed.
Can you run payroll for both Canadian and US employees?
Yes. We process both, including remittances, T4 and T4A slips on the Canadian side and W-2 and 1099 filings on the US side, which matters for businesses employing across the border.
Where to next
If payroll is being run without anyone reconciling it back to an external source, that gap is worth closing before someone else finds it. Our private company team handles payroll processing and the compliance calendar around it. If a transaction is on the horizon, buy-side due diligence covers how payroll gets tested. To talk it through, email Avnit Sekhon at avnit.sekhon@treewalk.com.
