How to Set Up CRA-Compliant Payroll for a New Business in Ontario

Starting a new business in Ontario is exciting  but the moment you hire your first employee, you step into a world of federal and provincial payroll obligations. Failing to set up payroll correctly from day one can result in CRA penalties, back taxes, and legal headaches that no new business owner wants. Whether you are launching a small startup in Mississauga, opening a shop in Oakville, or growing a service business anywhere in the Greater Toronto Area, this guide walks you through every step to set up CRA-compliant payroll in Ontario  the right way.

At Tax Square Professional Corporation, we help small and medium-sized businesses across Mississauga, Oakville, Milton, and the GTA stay fully compliant with CRA requirements while maximizing their financial efficiency. Our team of experienced CPAs provides end-to-end payroll, bookkeeping, and tax services so you can focus on growing your business with confidence.

CRA-compliant payroll means that your business correctly calculates, deducts, and remits all required source deductions to the Canada Revenue Agency on time. These deductions include Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and federal and provincial income tax. Employers are also responsible for making their own matching contributions to CPP and EI on top of what employees pay.

Non-compliance  even unintentional  can trigger audits, interest charges, and significant penalties from the CRA. This is why understanding the payroll setup process before you hire your first employee is absolutely critical for any new Ontario business.

The very first step is obtaining a Business Number (BN) from the Canada Revenue Agency. The BN is a unique 9-digit identifier that the CRA uses to track all your business accounts think of it as a Social Insurance Number for your company. Every business that plans to hire employees, collect GST/HST, or file corporate income taxes must have one.

You can register online through the CRA’s Business Registration Online (BRO) portal at canada.ca. You will need to provide your business name, legal structure (sole proprietorship, partnership, or corporation), operating address, and your personal Social Insurance Number (SIN). Registration is typically instant and free.

Once you have your BN, the CRA uses it as the foundation for all your program accounts including payroll.

After receiving your Business Number, you need to open a Payroll Program Account (also called an RP account). This is a separate account linked to your BN and is specifically used for remitting source deductions. The account number follows the format: 123456789 RP 0001.

You can open your payroll program account at the same time as your BN registration through the CRA BRO portal, or by calling the CRA business line. Make sure to do this before your first payroll run  ideally before you pay your first employee.

Before calculating any deductions, every new employee must complete two TD1 forms  the federal TD1 and the provincial TD1 for Ontario. These forms tell you how much personal tax credit the employee is claiming, which directly determines how much income tax you need to withhold from their pay.

Employees complete these forms on their first day of work and update them whenever their personal situation changes (for example, if they turn 65 or have a dependent). Store all TD1 forms securely as part of your employee records. Failing to collect proper TD1 forms can result in incorrect withholdings and compliance issues down the line.

Every pay period, you are required to calculate and deduct three things from your employees’ gross wages:

Canada Pension Plan (CPP) Contributions  For 2025, the CPP contribution rate is 5.95% on insurable earnings between the basic exemption of $3,500 and the yearly maximum pensionable earnings. As the employer, you match the employee’s CPP contribution dollar for dollar. This employer portion is an additional cost to your business beyond the employee’s wages.

Employment Insurance (EI) Premiums  EI premiums are deducted based on the insurable earnings of each employee up to the annual maximum. Employers pay 1.4 times the employee EI premium, making the total employer EI cost significantly higher than the employee contribution alone.

Federal and Provincial Income Tax  Use the CRA’s online Payroll Deductions Online Calculator (PDOC) or the T4032 Payroll Deductions Tables for Ontario to determine the exact amount of income tax to withhold based on the employee’s earnings, pay frequency, and TD1 claims.

All three deductions must be tracked accurately every single pay period. Errors here are one of the most common reasons new businesses face CRA payroll audits.

As a new employer in Ontario, you will generally be classified as a regular remitter by default. This means you must remit your source deductions (CPP, EI, and income tax  both employee and employer portions) to the CRA by the 15th of the month following the month in which the deductions were made.

For example, if you process payroll in January, your remittance is due by February 15th. Missing this deadline, even by one day, can result in late filing penalties starting at 3% of the amount owing, escalating quickly with additional delays.

As your business grows, the CRA may reassign you to an accelerated remitter schedule (bi-weekly or even twice monthly) based on your average monthly withholdings. Stay alert to any CRA correspondence about your remitter category.

This is a step many new Ontario business owners overlook. The Employer Health Tax (EHT) is a provincial payroll tax paid by employers to the Ontario Ministry of Finance to fund the provincial health care system.

If your total Ontario payroll is over $1,000,000 per year, you are required to register for and pay EHT. Small businesses with a payroll under this threshold are generally exempt, but if you expect rapid growth or already have multiple employees, you should check the current exemption thresholds and register proactively with the Ontario Ministry of Finance.

In Ontario, most employers are also required to register with the Workplace Safety and Insurance Board (WSIB) within 10 days of hiring their first employee. WSIB provides workplace injury and illness coverage for employees and protects employers from direct lawsuits related to workplace incidents.

Your WSIB premium rate depends on your industry classification. Failing to register can result in back premiums, penalties, and personal liability for workplace injury costs. Registration is done online through the WSIB website.

Manual payroll calculations are error-prone and time-consuming. Most Ontario small businesses benefit greatly from using payroll software or working with a professional payroll service provider. Whether you choose an automated software solution or outsource your payroll entirely, your system must accurately track:

Gross earnings, all deductions and contributions, net pay issued to each employee, and remittances sent to the CRA and other agencies. The CRA requires you to retain all payroll records for a minimum of six years from the end of the last tax year they relate to. This includes payroll journals, TD1 forms, T4 slips, and remittance records.

At the end of every calendar year, you must prepare a T4 slip for each employee summarizing their total earnings, income tax deducted, CPP contributions, and EI premiums for the year. You must provide T4 slips to employees and file a T4 Summary with the CRA by the last day of February of the following year.

Late filing of T4 slips attracts a penalty of $25 per day, up to a maximum of $2,500 per failure. For new businesses, this deadline often catches employers off guard especially if they are managing payroll manually or using disconnected systems.

Setting up payroll correctly from the start protects your business from CRA penalties, builds employee trust, and gives you accurate financial data to make smart business decisions. However, navigating federal and provincial payroll rules simultaneously is complex  and the cost of getting it wrong is high.

Tax Square Professional Corporation is a trusted accounting and tax firm serving businesses across Mississauga, Oakville, Milton, and the Greater Toronto Area. Our CPA-led team offers comprehensive payroll services including CRA registration, payroll processing, source deduction calculations, remittance management, T4 preparation, and year-end filing. We also provide full-service bookkeeping, corporate tax, and business advisory so your entire financial operation is handled by professionals who know Ontario’s tax landscape inside and out.

Whether you are setting up payroll for the first time or looking to fix compliance gaps in an existing payroll system, Tax Square PC has the expertise to get you fully compliant  fast.

Contact Tax Square Professional Corporation today at taxsquarepc.ca to schedule a consultation and set your Ontario business up for long-term financial success.

Q1. How soon do I need to register for a CRA payroll account after hiring my first employee in Ontario?

You should register for your CRA payroll program account before you process your very first payroll run. There is no strict grace period  if you pay an employee without a payroll account, you have no mechanism to remit source deductions, which immediately puts you in non-compliance with the CRA.

Q2. What is the penalty for missing a CRA payroll remittance deadline in Ontario?

If you miss your remittance deadline, the CRA applies a penalty starting at 3% of the amount owing for being 1 to 3 days late. The penalty increases to 5% for 4 to 5 days late, 7% for 6 to 7 days late, and 10% if you are more than 7 days late or if the amount was never remitted. A second failure in a calendar year at 10% or more draws a 20% penalty. Interest also accrues on unpaid amounts.

Q3. Do I need to register for Ontario’s Employer Health Tax (EHT) as a new small business?

Most new small businesses in Ontario are exempt from EHT if their total annual Ontario payroll is below the exemption threshold (currently $1,000,000 for most employers). However, if you anticipate growth that will push your payroll past this threshold, you must register with the Ontario Ministry of Finance and begin remitting EHT accordingly. It is always best to confirm your obligation with a CPA.

Q4. Can I use payroll software instead of hiring an accountant for CRA-compliant payroll in Ontario?

Yes, payroll software can automate deduction calculations and generate remittance schedules  but software alone does not guarantee compliance. You still need to correctly set up your CRA accounts, classify employees properly, collect TD1 forms, register for EHT and WSIB, and file year-end T4 slips accurately. Many Ontario business owners use a combination of payroll software and a professional accountant or CPA firm to ensure everything is done correctly from start to finish.

Q5. What records do I need to keep for CRA payroll compliance in Ontario?

The CRA requires all employers to retain payroll records for at least six years from the end of the last tax year they relate to. This includes TD1 forms from all employees, payroll journals showing gross pay and all deductions, proof of remittances sent to the CRA, copies of all T4 slips issued, and your T4 Summary filings. These records must be available for review in the event of a CRA payroll audit.

Tax Square Professional Corporation provides expert accounting, bookkeeping, payroll, and tax services to businesses across Mississauga, Oakville, Milton, and the Greater Toronto Area. Visit us at taxsquarepc.ca to learn more or to book your free consultation.