Canadian Payroll Reporter

CPR | June 2014 ASK AN EXPERT Annie Chong 7 Canadian HR Reporter, a Thomson Reuters business 2014 MANAGER OF CARSWELL'S PAYROLL CONSULTING GROUP annie.chong@thomsonsreuters.com | (416) 298-5085 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 vaca- tion pay. For federally-regulated em- ployers and employees, the re- quirements are set out in the Canada Labour Code. In all jurisdictions, employers must include the amount of bo- nus 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 in- cluded. Most jurisdictions require that employers include statu- tory holiday pay in employees' earnings when calculating the amount of vacation pay owing. Only Alberta and New Bruns- wick exclude it. Some employers pay employ- ees 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 re- quires to be included when cal- culating vacation pay. In most jurisdictions, employ- ers must pay employees four per cent or six per cent of their va- cationable 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 va- cation, you cannot use the bonus method. Instead, deduct income tax based on the payroll deduc- tions tax table that applies to the amount of vacation the employ- ee is taking. This applies regardless of the type of payroll you have. For ex- ample, if your payroll is monthly, but the employee takes a two- week vacation, use the biweekly payroll deductions table to cal- culate the amount of income tax to deduct for the vacation. You can use the bonus method to calculate income tax deduc- tions in situations where you pay vacation pay, but the employee does not take vacation time (for example, on termination of em- ployment). 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 Pen- sion 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, de- duct 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 sepa- rately, use the fixed contribution percentage rate to calculate the C/QPP contributions. For EI and QPIP, multiply the amount of va- cation 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 remuner- ation tax free to the employee's RRSP, provided the amount be- ing 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 em- ployee make the transfer. The onus is on the individual to ensure the amount trans- ferred does not exceed his RRSP deduction limit. An employer must have "reasonable grounds" to believe the employee can de- duct the contribution for the year. The CRA considers that the employer has "reasonable grounds" to believe the employ- ee can deduct the contribution if the employer has written con- firmation from the employee that the contribution can be de- ducted for the year or has a copy of the employee's RRSP deduc- tion limit statement, which the CRA sent to the individual along with a Notice of Assess- ment. 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 in- come tax deductions, the em- ployer 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. use the points they amass to choose gifts from a catalogue. A committee of employees and managers awards the points for things like perfect attendance, milestones, volunteering, etc. Are the gifts a taxable benefit? The CRA says yes. "The em- ployer controls the point sys- tem. The points are awarded to employees primarily for perfor- mance-related and/or employ- ment-related activities. There- fore, awards obtained through the point system are taxable." Scenario 3 An employer allows employees to select a birthday gift from a list of 15 specific items, each worth less than $500. The items are all non-cash. The employees work at arm's-length from the em- ployer. Would the gift be a tax- able benefit? The CRA says no, depending on the circumstances. If the em- ployer gives gifts throughout the year and the birthday gift "pushes the total value of the gifts given to over $500," the excess amount would be a taxable benefit. Birthday gifts taxable? from GIFTS on page 4

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