Including certain payments when calculating vacation pay; Using bonus method to calculate tax on vacation pay; Transferring vacation pay to an RRSP
Including certain payments when calculating vacation pay
Question: When calculating vacation pay, do we have to include amounts paid to an employee for a bonus or for statutory holiday pay?
Answer: Each province and territory, under their labour standards laws, determines the types of payments that are to be included when calculating vacation pay.
For federally-regulated employers and employees, the requirements are set out in the Canada Labour Code.
In all jurisdictions, employers must include the amount of bonus payments paid to employees when calculating vacation pay if the bonuses are work-related. Discretionary bonuses (such as those that having nothing to do with work) do not have to be included.
Most jurisdictions require that employers include statutory holiday pay in employees’ earnings when calculating the amount of vacation pay owing. Only Alberta and New Brunswick exclude it.
Some employers pay employees only their regular wages for vacation periods. This may or may not be correct, depending on whether the employee earned any other types of payments that labour standards legislation requires to be included when calculating vacation pay.
In most jurisdictions, employers must pay employees four per cent or six per cent of their vacationable earnings for vacation pay.
Using bonus method to calculate tax on vacation pay
Question: Can we use the bonus method to calculate the amount of income tax to deduct from vacation pay?
Answer: It depends on whether the employee is taking the vacation time for which you are paying the vacation pay.
If you pay vacation pay at the time the employee takes the vacation, you cannot use the bonus method. Instead, deduct income tax based on the payroll deductions tax table that applies to the amount of vacation the employee is taking.
This applies regardless of the type of payroll you have. For example, if your payroll is monthly, but the employee takes a two-week vacation, use the biweekly payroll deductions table to calculate the amount of income tax to deduct for the vacation.
You can use the bonus method to calculate income tax deductions in situations where you pay vacation pay, but the employee does not take vacation time (for example, on termination of employment). You can also use this method if the employee takes vacation, but is not paid vacation pay at the same time.
Vacation pay is also always subject to Canada/Quebec Pension Plan (C/QPP) contributions and employment insurance (EI) and Quebec Parental Insurance Plan (QPIP) premiums.
If you pay vacation pay with an employee’s regular pay, deduct C/QPP, EI and QPIP in the usual manner. For C/QPP, use the payroll deductions table that you would use for the employee’s regular earnings.
If you pay vacation pay separately, use the fixed contribution percentage rate to calculate the C/QPP contributions. For EI and QPIP, multiply the amount of vacation pay by the current fixed premium percentage rates. In all cases, do not deduct C/QPP, EI or QPIP if the employee has already reached the maximum annual contribution/premium.
Transferring vacation pay to an RRSP
Question: Can employees request to have their vacation pay transferred to a registered retirement savings plan (RRSP)? If so, do we deduct income tax?
Answer: Yes, an employee can request to have vacation pay transferred to a registered retirement savings plan (RRSP) or registered pension plan with no tax withholding.
An employer, upon request from an employee, is permitted to transfer any type of remuneration tax free to the employee’s RRSP, provided the amount being transferred will not exceed the employee’s RRSP deduction limit. It must be the employer who makes the contribution.
In other words, the employer cannot pay the money to the employee and then have the employee make the transfer.
The onus is on the individual to ensure the amount transferred does not exceed his RRSP deduction limit. An employer must have “reasonable grounds” to believe the employee can deduct the contribution for the year.
The CRA considers that the employer has “reasonable grounds” to believe the employee can deduct the contribution if the employer has written confirmation from the employee that the contribution can be deducted for the year or has a copy of the employee’s RRSP deduction limit statement, which the CRA sent to the individual along with a Notice of Assessment.
The employer does not need a letter of authority from the CRA to make the transfer.
Although the amount to be transferred is not subject to income tax deductions, the employer must still deduct C/QPP contributions and EI and QPIP premiums, provided that the employee has not reached the annual maximum contribution or premium limits.
Annie Chong is the manager of the Payroll Consulting Group at Carswell.