There are many documents on the Canadian government’s website that explain payroll deductions. This article covers how these payroll deductions can be achieved in a Canadian SAP Payroll system. I give a brief overview of the different payroll deductions; however, since these are already well documented by the respective government agencies, I do not go into detail. The main focus is how these can be done in the SAP system and what options the SAP system offers to keep users compliant with Canadian payroll regulations. My purpose is to consolidate all the information in one location, some of which is not clearly documented elsewhere.
(Note: SAP usually releases new wage types at the end of the year, via Support Packages, although in some situations they may be released mid-year. SAP offers educational sessions and updates for companies and also uploads this information on its SAP Service Marketplace website.)
Every country has its own rules and regulations for personal income tax and statutory contributions. In Canada, a lot of information about this is provided by the Canada Revenue Agency (CRA) and other government agencies. Here I show how to execute these Canadian legislations in the SAP ERP HCM payroll system.
In Canada there are a total of 13 provinces and territories. Apart from Quebec, all the other provinces have similar statutory contributions and deductions. In this article I cover the details for the most important statutory contributions and deductions for the 12 provinces and territories, and for Quebec, with special emphasis on how these are configured in the SAP ERP HCM payroll system.
I cover the following Canadian-specific payroll contributions, deductions, and concepts:
- Canadian Pension Plans (CPPs)
- Canadian employment insurance
- Provincial Paternal Insurance Plan (PPIP)/Quebec Paternal Insurance Plan (QPIP) calculations
- Canadian health taxes
- Canadian employer tax levy/contribution to the Financing of the Commission des normes du travail (CNT—for Quebec only)
- Canadian compensation tax
- Canadian manpower levy/contribution to the Workforce Skills Development and Recognition Fund (WSDRF)
- Canadian withholding tax
- Canadian infotypes in the SAP system
Important Wage Type Concepts
Before I go into more detail, you first must understand some of the important concepts of wage types, which are extensively used for payroll configuration.
Base Wage Types
Base wage types are typically the earnings base on which deductions are done. For most statutory contributions, there is an earnings base in the SAP system. For example, wage type /120 is the base earning for the CPP, so all the pensionable earnings or wage types are cumulated into wage type /120. The cumulation classes assist with these calculations.
The configuration for base wage types is done in table v_512W_D (Figure 1).
Configure base wage types in table v_512W_D
In Figure 1, wage type 0001 is a pensionable earning, so it should be added to the CPP base earnings wage type /120. This is achieved by selecting the wage type for cumulation class 20.
Contribution Wage Types
Contribution wage types store the employee or employer deductions/contributions.
These are deductions made from employees’ earnings for their pension plans. The amount deducted goes into the employee’s pension plan and is paid to the employee by the government when the employee retires. The employer also matches the employee contribution. In the Quebec region this is called the Quebec Pension Plan (QPP) instead of CPP.
Method of Calculation
Every year, the Maximum Annual Pensionable Earnings rate is defined by the CRA (e.g., the maximum ceiling amount on which the CPP/QPP can be calculated). Also an annual basic exemption is defined. So the maximum contributory earnings that are subject to CPP/QPP is (Maximum Annual Pensionable Earnings) – (Annual Basic Exemption amount). For example, for the year 2014:
($52500 – $3500) x 4.95% = $2,425.50
Where $52,500 is the Maximum Annual Pensionable Earnings
$3,500 is the basic exemption
$4.95 is the contribution rate
This means that in 2014, the total CPP deduction cannot exceed $2,425.50 for an employee. If an employee reaches this amount in the middle of the year, then for the rest of the year no CPP deductions are taken for that employee. Table 1 lists the pension rates by year for the past four years.
Maximum annual pensionable earnings (CPP)
Maximum annual pensionable earnings (QPP)
Maximum contributory earnings
Employee contribution rate (CPP)
Maximum annual employee contribution (CPP)
Employee contribution rate (QPP)
Maximum annual employee contribution (QPP)
CPP slab rates (e.g., CPP rates by year) for 2011–2014 (Source: http://www.cra-arc.gc.ca/
(Note: For the purposes of this article, the dollar sign ($) refers to the Canadian dollar, not the US dollar or another currency.)
Relevant Wage Types and Cumulation Classes
Table 2 lists the relevant wage types for CPP/QPP calculations. Base wage types are the wage types that store the pensionable earnings.
Canadian-specific wage types for calculating CPP/QPP earnings
(Note: Wage types /118 and /119 are non-exempt wage types (e.g., when calculating CPP/QPP, the basic exemption is not calculated on these amounts). These earnings can include wages that come from retroactive or bonus payments.)
Where Are CPP/QPP Rates Stored?
Table T5KTC stores data such as the maximum CPP or QPP amount, the CPP or QPP rate, and basic exemptions. Figure 2 shows this table with the CPP rates.
Table T5KTC with the CPP rates
Figure 3 shows the same table with the QPP rates.
Table T5KTC with the QPP rates
Calculations During a Payroll Run
Once the schema is executed, function KATAX in sub-schema KTX1 is called with SI as the first parameter (Par1). It calculates the CPP/QPP rates (Figure 4).
Schema KTX1calls function KATAX with SI as the first parameter
(Note: SI is a parameter that determines what type of tax is calculated. For example, if you enter ICTX instead of SI, it calculates the income tax. SI is used for the calculation of CPP/QPP/EI taxes.)
Here are four scenarios to illustrate how this works.
- Excess CPP deductions: If too much CPP is deducted, employees can claim their refund from the government when they file their income tax and benefit returns. Employers, however, cannot refund these directly to the employee.
- Changes in employment status or job: If an employee changes his or her employment status with the company during the year, the new employer deducts the CPP/QPP payment without considering the amount that has already been deducted by the previous employer. This can lead to over- or underpayment of the total CPP/QPP amount.
- Transfers to another province (either to Quebec or from Quebec): If an employee from any other province is transferred to Quebec, then the CPP deducted up to that day is taken into consideration when calculating the CPP/QPP, and the maximum amount for the province of Quebec is the amount paid, and vice versa.
- Mergers and acquisitions: In these cases (as per Canadian tax regulations), the previously deducted CPP/QPP amount would be considered. In the SAP system, if there is a change in the business numbers (called FEIN in the US) as a result of a merger or acquisition, then an entry has to be made in table T5KBN for the system to consider the previously deducted amount.
CPP/QPP Year-End Forms Reporting
In this section, I discuss how these CPP/QPP contributions are reported and give a brief overview of the required year-end forms and their entries. Figure 5 shows Form T4 (Statement of Remuneration). Click here to view an online version.
The T4 form
Figure 6 shows Form RL1 (which is the same thing as Form T4, but it is only applicable to Quebec). Click here for an online version.
The RL1 form
T4 Form: CPP contributions are shown in box 16 of the T4 form; only the employee contributions are shown. QPP contributions are shown in box 17; only the employee contributions are shown.
(Note: There are boxes in Form T4 that report earnings or deductions. The actual box names on these forms are not the same as what is shown in the SAP system. In the SAP system, there is a box 2, which is box B in the T4 form. I have highlighted (boxed in red) these differences relevant to CPP/QPP in Figure 6.)
RL1 Form: QPP contributions are shown in box B (SAP box 2) of the RL1 form.
(Note: In SAP configurations the box numbers for Form RL1 do not reflect the actual box numbers on the RL and RL2 forms. In cases where they differ, I show the relevant SAP box numbers in brackets.)
Employee Exemptions from CPP
If you want to exempt an employee from having to make CPP deductions, then a relevant value has to be entered in infotype 0464 (additional tax data Canada) in the CPP tax authority (Figure 7). For example, employees who are between the ages of 65 and 70 and receive pension funds can opt out of contributing. In that case, they would request that the employer not deduct CPP payments.
Exempt an employee from having to make CPP contributions
An employee would qualify for this type of exemption for a variety of other reasons. In the screen in Figure 7, go to the CPP line, press F4, and the list of exemptions is displayed (a partial list is shown in Figure 8). Select the desired exemption and click the save icon (not shown) to save your changes.
CPP contribution exemptions listed in the SAP system
Employment Insurance Deductions
Payments for employment insurance are deducted from the employee’s wages and placed in a fund to cover temporary financial allowances for employees who are ill, are pregnant or have adopted a child, or lose pay because they’re not working because of skills training. This would include parents on maternity/paternity leave, employees who are out of work on disability, and other such payments.
Calculating Employment Insurance Payments
Similar to the way CPP/QPP is calculated, the employer also makes contributions to the employment insurance fund. In this case, the employer contribution rate is 1.4. That means that for every $1.00 that an employee contributes, the company contributes an additional $1.40.
Also as with CPP, there is a maximum limit (cap) on earnings on which the employment insurance deduction can be calculated. Again, as for CPP, there is a separate (different) rate for Quebec. Table 3 shows the various rates by year (for the most recent four years) for this deduction and the matching employer payments.
Cap on earnings and rates for employment insurance payments
Table 4 shows a list of the employment insurance-relevant wage types for the Canadian federal SAP payroll system. (The federal and Quebec wage types are the same; however, the rates are different for Quebec.)
Employment insurance wage types
This data (e.g., the maximum employment insurance amounts and employment insurance rates) is stored in table T5KTC (Figure 9). Quebec rates are identified by QC in the second column (Pr...).
Table T5KTC with federal and Quebec employment insurance rates
During a payroll run, function KATAX calculates the employment insurance amounts when called with SI as the first parameter (as shown in Figure 4). These amounts include the employee’s deductions and the employer’s contributions.
Reduced Employment Insurance Premiums
Some employers offer a wage-loss replacement plan for short-term disability for their employees. If the plan meets certain standards (established by Canadian Employment Insurance Regulations), the employer’s employment insurance premiums could be paid at a reduced rate (e.g., at a rate less than 1.4 times the employee’s premiums).
For example, if an employer provides employees with a short-term disability plan, then the employer may be entitled to premiums less than 1.4 times the employee’s premium. Again these are subject to certain requirements as defined by Employment and Social Development Canada (ESDC). For more details click here.
To achieve this constant, Txx has to be maintained in table v_T511K (Figure 10). Txx has a value like 120 (e.g., the employer employment insurance’s rate is 120 percent of the employee’s employment insurance contribution). The actual value of the employer employment insurance’s rate is 1.4 times (e.g., 140 percent).
Constant values in table V_T511K with reduced employment insurance rates
Then, in table V_T5KB1_K, you link this constant value to the Business Number and Account Number to which the reduced rates apply (Figure 11). Once this is done, the reduced employment insurance rates would apply for all the employees who have that business number in their tax infotypes.
Assign the constants to the business and account numbers
This works the same way for employers in Quebec who pay the employer QPIP contributions—the employer employment insurance rate is reduced.
Exempt an Employee from Making Employment Insurance Contributions
The process for exempting an employee from having to make employment insurance payments is the same as for exempting an employee from making CPP payments. However, the value in the employment insurance field has to be modified with different infotypes and reason codes, as shown in Figures 12 and 13.
Infotype 464 with options to exempt employment insurance
Reasons for employee exemption
Employment Insurance Year-End Form Reporting
The employee employment insurance contributions are shown in box 18 of Form T4 (Figure 5). In Form RL1, the employee employment insurance contributions are shown in box C (SAP box 3).
The PPIP/QPIP contributions are deducted from employees’ earnings. These amounts are used by the provincial governments for providing maternity, paternity, and parental and adoption benefits to qualified persons. Currently this contribution is applicable for the Province of Quebec. The QPIP rates for 2014 are as follows:
- The employee contribution rate: 0.559 percent
- The employer contribution rate: 0.782 percent
The maximum yearly earnings that are subject to QPIP for 2014 are $69,000.
PPIP/QPIP Wage Types
SAP has provided the /1P* series wage types for PPIP/QPIP base earnings. The asterisk (*) is replaced by the province abbreviation (for example, for Quebec it’s /1PQ and for Ontario it’s /1PO). Employee contributions are stored in wage type /3P*, and employer contributions are stored in wage type /4P*.
Reduced Employment Insurance Contributions
Because the employer is contributing towards QPIP, there is a reduced rate for the employer employment insurance contribution. This reduced rate is fixed by the Canadian government. For 2014, for example, the employer employment insurance contribution was reduced by .35 percent of QPIP-eligible earnings, as follows:
- The employer employment insurance rate for Quebec for 2014 is 1.53
- The employment insurance earnings – wage type /122 = 5000
- The QPIP earnings – wage type /1PQ = 4000
In this example, the employer employment insurance wage type /422 should be 76.5 (5000*1.53%).
And the employment insurance contribution is reduced from 76.5 to 62.5, because the employer is contributing to QPIP:
The employer employment insurance rate = 76.5 – (4000*.35%) = 76.5 – 14 = 62.5
Configuration Changes for PPIP/QPIP
SAP has not provided any cumulation class for PPIP/QPIP. Processing class 84 (value 1) has to be maintained for all the earnings wage types that are included in the PPIP/QPIP base earnings wage type /1P* (Figure 14), and table T5KVE has to be maintained (Figure 15).
Select the wage type for processing class 84 in table v_512W_D
Operation KADDC reads processing class 84 for any wage type, and then it creates the base wage type /1P*. The province for which the wage type is created depends on the check boxes selected in table T5KVE.
In Figure 15, the first column is for processing class (PCI). The second column (S…) is the processing value for each wage type. The third column (P…) is the payroll modifier value set by operation KMODI. The other columns (with check boxes) are for each of the following Canadian Provinces:
- British Columbia
- New Brunswick
- Nova Scotia
- Northwest Territories
- Prince Edward Island
Depending on which province box is selected, the SAP system creates a wage type for that province. So, for example, if the Quebec Province check box is selected, the system creates wage type /1PQ. This data (e.g., the maximum employment insurance amounts and employment insurance rates) is stored in table T5KTC (Figure 16).
Table T5KTC with QPIP rates
The code PP in the first column denotes if it’s PPIP or QPIP. QC in the second column means that it’s for Quebec (which is QPIP). The first row is for employee contribution rate and the maximum contribution amount, and the second row is for employer rate and maximum employer contribution.
During a payroll run, function KATAX calculates the PPIP/QPIP contributions when called with SI as the first parameter (as shown in Figure 4).
The Canadian healthcare tax is only paid by the employer—there is no employee contribution. It is called different names in different provinces. For example, in Ontario, it’s called the Employer Health Tax; in Quebec it’s called the Health Services Fund; in Manitoba it’s called The Health and Post-Secondary Education Tax Levy; and in Newfoundland and Labrador it’s called the Health & Post-Secondary Education Tax. For each of these, the employer contribution is calculated differently.
In Ontario, there is no tax on company base earnings up to $4,000,000. However, companies’ base earnings above $4,000,000 are taxed at a rate of 1.95 percent.
In Quebec, healthcare is taxed using the following calculation:
Health Services Fund = Base Earnings * (2.31+ (.39*S))
Where S = 1 (if base earnings are less than $1,000,000)
S = 5(if base earnings are greater than $5,000,000)
S = base earnings/1000000 (if base earnings are between $1,000,000 and $5,000,000)
In Manitoba, if the base earnings (payroll) for the company are under $1,250,000, then the company is exempt from the healthcare tax.
If the base earnings are between $1,250,000 and $2,500,000 then the company is taxed at a rate of 4.3 percent of the amount in excess of $1,250,000.
If the base earnings are $2,500,000 and above, the tax rate is 2.15 percent of the total amount.
In Newfoundland and Labrador, if the gross earnings (payroll) of the company’s employees are under $1,250,000, then the company is exempt from the healthcare tax. If the gross earnings (payroll) of the company’s employees are $1,250,000 and above, the company is taxed at a rate of 2 percent of the total amount.
The wage types are listed in Table 5.
Canadian wage types
Wage Type Configuration
All the wage types that have to be included in the base earnings (e.g., wage type /1H*) are assigned processing class 65 (Figure 17).
Assign processing class 65 to the appropriate wage types
These various tax rates are stored in table V_T511K (Figure 18).
Tax rates are stored in table V_T511K
Employer Tax Levy/Contribution to the Financing of the Commission des Normes du Travail (CNT)
The details for these contributions are as follows. (This section is applicable only for the province of Quebec.)
Effective 01.01.2012, there are a couple of changes with regards to the calculation of tax levies. (For more detail refer to SAP Note 1605354; log-on required.) They are as follows:
- The contribution rate is 0.08 percent.
- The maximum limit of earnings on which this is calculated is $66,000 (for 2012). So, for example, in 2012, for an employee, the contribution should not exceed 52.8.
- There is no employee contribution—only the employer makes a contribution.
Table 6 lists these wage types.
The rates and maximum limits are stored in table V_T511K (Figure 19).
CNT rates from table V_T511K
Calculations During a Payroll Run
In the payroll schema, function KFTAX calculates the employer levy (Figure 20).
Function KFTAX in the payroll schema
The compensation tax is a tax on financial institutions that is only applicable in the province of Quebec. There is an employer contribution, but no employee contribution. Table 7 lists the wage types.
Compensation tax wage types
There is no separate cumulation class for the compensation tax. The compensation tax is based on the total sum of earnings in wage types /152, /153. /158, and /160. The rate of contribution is 1.5 percent, and there is no employee contribution. The rate of the contribution is stored in Table V_T511K (Figure 21).
During a payroll run, these calculations are in the payroll schema. Function KFTAX calculates the employer levy (see Figure 20).
Manpower Levy/Contribution to the Workforce Skills Development and Recognition Fund (WSDRF)
WSDRF is also called the 1-percent law, and it’s applicable to Quebec only. Employers have to contribute 1 percent of their payroll (e.g., 1 percent of the gross payroll or base earnings) into a fund for the training needs of the workforce. There is no employee contribution.
Table 8 lists the wage types.
WSDRF levy wage types
There is no separate cumulation class for a manpower levy. The manpower levy is based on the sum of earnings in wage types /152, /153, /158, and /160. The rate of contribution is 1 percent, and there is no employee contribution. The rate of contribution is stored in table V_T511K (Figure 22).
If the SAP system calculates this tax, then the rate of 1 percent has to be maintained here. The WSDRF levy taxes are calculated during a payroll run in the payroll schema, with function KFTAX calculating WSDRF (Figure 18).
There are two types of withholding taxes in Canada:
- Federal tax
- Provincial tax
Federal and provincial tax rates are set by the CRA. The federal tax tables are shown in Figures 23 and 24 (for an online version, click here).
Federal tax rates
Federal tax rates table in the SAP system (table T5KTC)
The provincial tax table is shown in Figure 25.
Provincial tax rates (SAP table T5KTC)
There are two options for withholding taxes.
Option 1: This option determines the federal and provincial or territorial tax deductions on salary, wages, taxable benefits, pension income, commissions, and other periodic payments. This option can also be used to calculate the tax on a bonus or other non-periodic payment.
Option 2: The formulas for option 2 are intended for employees whose pay varies considerably from one pay period to the next. In this option, the amount of tax to be deducted is based on the projected annual taxable income (including bonuses) compared to the amount of tax already deducted in the year.
For more details click here to refer to the CRA website.
In most cases option 1 is used, as option 2 is only used for employees whose pay fluctuates from one pay period to another. An example of pay for this second option would be employees who are paid on a commission basis.
By default option 1 is used. To use option 2 you need to activate a Business Add-In (BAdI), as shown in Figures 26 and 27.
BAdI to activate option 2
Wage Types – Tax Calculations
Tables 9 and 10 list the various wages for tax calculations.
During tax calculations the amounts in wage type /102 are multiplied by the remaining number of pay periods. However, the amount in wage type /103 is not multiplied (wage types that are used for making one-time payments can be cumulated here).
The amount in wage type /106 reduces the total annual taxable salary. This amount is multiplied by the total number of pay periods, similar to wage type /102.
The amount in wage type /108 is also tax exempt, but these are the tax exemptions for one-time payments. Similarly, there are wage types /152 (equivalent to /102), /153 (equivalent to /103), /156 (equivalent to /106), and /161 (equivalent to /108) for Quebec.
Function KTAX, with a first parameter of ICTX, calculates the federal and provincial taxes. There are no separate wage types for federal and provincial taxes except for Quebec.
Where Are Taxes Calculated During Payroll Runs?
Taxes are calculated by function KATAX when called with parameter ICTX in sub-schema KTX1 (Figure 28).
Function KATAX called with parameter ICTX
Here is a list of some important infotypes for taxation in Canada:
- Infotype 0461
- Infotype 0462
- Infotype 0463
- Infotype 0464
I discuss each in a bit more detail in the following.
Infotype 0461 – Canadian Tax Assignment
Infotype 0461 maintains details such as the employee residence, the province of employment, and the employee’s work number. If the employee is from Quebec, then the Quebec tax ID is also maintained here (Figure 29).
Tax infotype 0461
Infotype 0462 – Canadian Provincial Tax
Infotype 0462 maintains the provincial tax details. These include the total credits for the provincial income tax, any other credits (like donations), deductions, and additional taxes.
(Note: No wage types are created for credits. These amounts are directly used in the program during tax calculations.)
SAP provides utility programs that update the total credit amounts for all employees. (For more information, refer to SAP Note 1946608 – released for 2013 year end.)
Figure 30 shows the provincial infotype for Quebec.
Provincial tax infotype for Quebec
Figure 31 shows the provincial infotype for Ontario.
Provincial tax infotype for Ontario
Infotype 0463 – Canadian Federal Tax
In infotype 0463 the calculations that impact federal taxes are maintained (Figure 32).
Canadian federal tax infotype
Every year the Total credits amount is updated as a part of the year-end exercise. SAP provides utility programs that update the total credit amounts for all the employees. (Refer to SAP Note 1946608—released for 2013 year end.)
Remuneration and expense details from employees who earn commission with expenses are entered under the Commission from TD1X section.
Deductions authorized by CRA are entered under the Other Deductions and Credits section. For example, CRA may authorize the reduction of an employee’s taxable income based on form T1213.
Infotype 0464 – Additional Canadian Tax Data
Infotype 0464 can be used to override calculations shown in Figures 33 and 34, in the tax authority column. For example, you can override CPP and EI (employment insurance) calculations performed by the system here.
The list of exemptions for an employee from Ontario
The list of exemptions for an employee from Quebec
Possible Values Under the Tax Indicator
The possible values available depend on the settings in the tax authority (TaxI…) column. In Figures 33 and 34, the options for each tax authority vary. Figure 35 shows the F4 values for tax authority FIT.
Possible values for the tax type FIT infotype