How Payroll Source Deductions Work and Why You Remit Them to CRA

The first time you hire someone in Canada, the payroll rules feel like a second job. You have to withhold money from your employee's cheque, add more money on top of that, and send it all to CRA on a deadline you did not know existed. Missing it costs you money. This post explains how it works so you are not caught off guard.

This is general educational information, not specific tax or payroll advice. Your situation may vary. Consult your accountant or payroll provider for your specific setup.

What Source Deductions Are

When you pay an employee in Canada, you are required by law to deduct certain amounts from their gross pay before they receive it. Those deductions are held in trust for CRA. They are not your money. They never were. You are the collection agent for three things:

• Canada Pension Plan (CPP) contributions from the employee
• Employment Insurance (EI) premiums from the employee
• Federal and provincial income tax based on the employee's TD1 form and the CRA payroll deductions tables

The total of these three items is the employee's source deductions. You withhold them, you do not pay them to the employee, and you remit them to CRA.

The Employer's Share: What You Add on Top

Source deductions from the employee's pay are only part of what goes to CRA. As the employer, you also owe your own separate contributions.

• CPP employer match: You match the employee's CPP contribution dollar for dollar. If the employee pays $300 in CPP, you owe another $300.
• EI employer premium: You pay 1.4 times the employee's EI premium. If the employee's EI deduction is $100, you owe $140.

You do not deduct the employer share from the employee's pay. You pay it yourself, on top of the gross wages. This is your payroll cost beyond the salary.

The Common Mistake: Spending the Money Before You Remit It

The most common and most expensive payroll mistake small business owners make is treating source deductions like available cash. The deductions sit in the bank account alongside operating funds, cash gets tight, an owner draws from the account, and then the remittance deadline arrives.

The dollar cost of this mistake is significant. CRA charges a penalty of 10 percent for a first failure to remit on time, and 20 percent for a second failure within a calendar year. Interest also accrues daily. On a $10,000 remittance, a first late penalty is $1,000 plus daily interest. CRA also has the authority to assess the business owner personally for unpaid source deductions, meaning the debt follows you even if the corporation is dissolved. This is one of the few tax debts in Canada where corporate liability does not protect you.

What the PD7A Is

The PD7A (formally called the Statement of Account for Current Source Deductions) is the remittance form you use to send source deductions to CRA. When you register as an employer with CRA, they set you up with a payroll account (format: 123456789 RP 0001). CRA will issue PD7A statements showing the amounts owed and the deadline.

Most small businesses remit monthly. CRA sets your remittance frequency based on your average monthly withholding from two calendar years prior. If you are new, you start as a regular monthly remitter. As your payroll grows, CRA may move you to accelerated (twice monthly or even weekly) remittance schedules. Check your payroll account in My Business Account to confirm your current frequency.

The Remittance Deadline

For regular monthly remitters, the deadline is the 15th of the month following the pay period. So for wages paid in June, source deductions are due July 15. Miss that date and the penalty clock starts immediately.

You can remit through your bank's online bill payment (payee: Receiver General for Canada), through My Business Account at CRA, or through a payroll service provider that remits on your behalf.

What to Do About It

1. Open a separate bank account for source deductions. Every payroll run, move the full remittance amount (employee deductions plus your employer share) into that account immediately. Treat it as money already spent.
2. Know your remittance frequency. Log into CRA My Business Account and confirm whether you are a monthly, accelerated, or quarterly remitter. Missing a deadline because you thought you had more time is not a defence.
3. Use the CRA Payroll Deductions Online Calculator (PDOC) or a payroll service. Manual calculations from the tables work, but PDOC is faster and reduces errors. Most payroll software (QuickBooks Payroll, Wagepoint, Humi, etc.) calculates and tracks this automatically.
4. Reconcile before every T4 season. At year end, your total remittances should match the total source deductions recorded across all pay stubs for the year. A reconciliation in December is much easier to fix than discovering a shortfall in February during T4 filing.
5. File T4s and T4 Summary by the last day of February. Even if you remit on time all year, missing the T4 filing deadline triggers separate penalties. The T4 Summary is essentially your annual reconciliation statement to CRA.

Quebec Is Different

If you have employees working in Quebec, you remit provincial income tax and QPP (Quebec Pension Plan) to Revenu Quebec separately, not to CRA. EI premiums for Quebec employees use a different rate. Quebec runs its own parallel payroll remittance system. This post covers the federal framework; Quebec employers need to manage both.

The Bottom Line

Payroll source deductions are not your money the moment you withhold them. They belong to CRA and your employees' future entitlements. Separate the funds, know your deadline, and remit on time every time. The penalties for getting this wrong are steep and personal. If your payroll setup feels uncertain, get it reviewed now before a problem compounds. Book a free call at peterxiacpa.com/book.

Next step: browse the free small business tax deduction guide.