Indigenous Payroll (Status Indians)

As an employer of Indigenous Canadians or if you have an employee who qualifies as "Indian" (as defined under the Indian Act), you can set up your payroll to support tax exemptions using specialized earnings codes.

In general, custom earnings codes are used to create different calculation rules for employment income. The Canada Revenue Agency and the Indian Act make a distinction between wages earned on a Reserve and those wages earned outside of a Reserve. Typically, earnings on a Reserve are exempt from withholding taxes. For more details, please consult the CRA site.

In most cases, you must deduct payroll taxes and other withholding taxes (like Canada Pension Plan contributions) from employees. However, if your staff member's income is not taxable under the Indian Act, you do not need to withhold these amounts. An employee should provide a completed TD1-IN form (see Determination of Exemption of an Indian's Employment Income for details) for payroll tax exemption and a completed CPT20 form (see Election to Pay Canada Pension Plan Contributions for details) to contribute to the Canada Pension Plan. Note - employees cannot typically opt out of paying Employment Insurance (EI) premiums.

Your staff member may earn some income that is taxable and other income that is non-taxable. These earnings may occur within the same pay period. Your payroll service can handle these scenarios easily. To get started you will need to setup two custom earning codes - one that is taxable and another that is non-taxable.

Taxable Earnings

1. Enter Settings (the bottom left gear icon in your payroll profile menu) -> Pay Rules -> Earnings
   
   
   
    
2. ADD a new rule
   
   
   
    
3. Enter the following to set the taxable earnings rule
   • Name: enter the name for this rule. This will be shown on the employee's pay slip and your payroll reports
   • Description: any further details you want to include about this earnings code (optional)
   • GL: If you have the project costing feature in your plan, you can designate a general ledger code for this earning. Otherwise, leave this blank.
   • Enabled: check the box to make this new earnings code available to use in your pay runs
   • T4 Box: enter a custom box number if you want these earnings to show on year end tax slips. If left blank, these earnings will show in box 14.
   • Provincial box: for Québec-based employees, enter a custom box letter for these earnings. If left blank, these earnings will show in box A on the employee's RL-1
   • CPP/EI/FED/PROV: ensure these are checked - the system, will calculate withholding taxes on this earnings code.
   • Occasional Earnings: leave unchecked (this field is used to denote bonuses and other non-regular earnings)
   • Vacationable: check if the earning is subject to vacation calculations (i.e. the recipient earns vacation pay on the amount)
     
     
     
     
      
4. Save the rule

This earning is now available to be used in a pay run. Typically, wages earned outside of a Reserve would be taxable and would be categorized using this new earnings code.

 

Non-Taxable Earnings

Follow steps 1 and 2 from above.

1. Enter the following to set the non-taxable earnings rule

• Name: enter the name for this rule. This will be shown on the employee's pay slip and your payroll reports
• Description: any further details you want to include about this earnings code (optional)
• GL: If you have the project costing feature in your plan, you can designate a general ledger code for this earning. Otherwise, leave this blank.
• Enabled: check the box to make this new earnings code available to use in your pay runs
• T4 Box: enter 71. If you pay tax-exempt income to a self-employed Indian worker who is a fisher, barber or hairdresser, a taxi driver or driver of other passenger carrying vehicles, enter 88.
• Provincial box: for Québec-based employees, enter R. You will need to manually enter R-1 in one of the blank boxes of the RL tax slips, followed by the amount of gross employment non-taxable income on the RL-1 slip at year-end.
• CPP/FED/PROV: ensure these are NOT checked - the system, will NOT calculate withholding taxes on this earnings code. The EI field should be checked as the employee will contribute to the Employment Insurance program.
• Occasional Earnings: leave unchecked (this field is used to denote bonuses and other non-regular earnings)
• Vacationable: check if the earning is subject to vacation calculations (i.e. the recipient earns vacation pay on the amount)
  
  
  
   

This earnings rule is now available to be used in a pay run. Typically wages earned on a Reserve would be non-taxable and would be categorized using this earnings code.

 

Performing a pay run

Now that you've set up both earnings codes, you can use them easily during a pay run. Use the ADD icon to include any earnings for staff members during a pay run. Select the appropriate earnings code (taxable vs non-taxable based on the earnings of the employee). You can include both taxable and non-taxable earnings within the same run for the same employee - the system will handle these calculations for you.