Partnership: Payroll

Payroll in a partnership must distinguish between two categories of individuals who receive amounts from the business: partners, who are owners and are not employees of their own firm, and employees, who are engaged under contracts of service. Amounts paid to partners are allocations of income or withdrawals of capital and are not subject to payroll source deductions. Amounts paid to employees are remuneration and are subject to the full payroll regime. General payroll procedures and the provincial schedule of rates appear on the Payroll page.

TREATMENT OF PARTNERS

• A partner cannot be an employee of the partnership of which the partner is a member. Salary or interest allowances to partners under the partnership agreement are allocations of partnership income, recorded in the partners' capital accounts, not wage expense.

• No T4 slip is issued to a partner, and no income tax, CPP or QPP, or EI is withheld from drawings.

• Each individual partner reports the allocated share of partnership income on Form T2125 (or Form T2125 with the T5013 slip information) and pays income tax personally, generally through quarterly instalments where net tax owing exceeds $3,000 (or $1,800 in Quebec).

• Canada Pension Plan: individual partners contribute as self-employed persons on their share of net business income, at 11.9% on earnings between $3,500 and $74,600 (maximum $8,460.90 for 2026) and 8% CPP2 on earnings between $74,600 and $85,000 (maximum $832), calculated on Schedule 8 of the T1 return. One-half of the base contribution is claimed as a non-refundable credit and the employer-equivalent portion and enhanced contributions are deductible.

• Quebec Pension Plan: partners resident in Quebec contribute at the self-employed QPP rate, and pay Quebec Parental Insurance Plan premiums as self-employed workers.

• Employment Insurance: partners are not insured for regular benefits. Self-employed individuals may enter into an agreement with the Canada Employment Insurance Commission to obtain access to special benefits (maternity, parental, sickness, compassionate care, and family caregiver benefits) by paying premiums on self-employment earnings.

• Corporate partners: where a partner is a corporation, the individuals who work in the business are typically employees or shareholders of the corporate partner, and the corporate partner's own payroll rules apply.

EMPLOYEES OF THE PARTNERSHIP

• A partnership that pays remuneration to employees is an employer and must register for a payroll deductions program account (RP) under its own business number.

• The partnership must obtain a TD1 federal and provincial form from each employee, withhold income tax, CPP or QPP contributions, and EI premiums (and QPIP premiums in Quebec), and remit them with the employer's share of CPP or QPP, EI, and QPIP.

• Remittance frequency and penalties are the same as for any other employer (regular, quarterly, or accelerated remitter status).

• T4 and T4 Summary (and RL-1 in Quebec) are filed by the last day of February following the calendar year; a Record of Employment is issued within five days of an interruption of earnings.

Employment of relatives of partners

• Wages paid to a spouse, child, or other relative of a partner are deductible to the partnership only if the services are actually rendered and the amount is reasonable.

• Employment of a related person is insurable for EI purposes only if the terms and conditions are substantially similar to those of an arm's-length employee.

• Remuneration paid to the partner's own children under 18 is not subject to CPP contributions until the month after the child turns 18.

LIABILITY FOR UNREMITTED DEDUCTIONS

• Source deductions withheld from employees are held in trust for the Crown.

• In a general partnership, each general partner is jointly and severally liable for the partnership's obligations, including unremitted source deductions, penalties, and interest.

• In a limited partnership, the general partner bears this liability; limited partners are not liable beyond their contributions unless they participate in the control of the business.

• In a limited liability partnership, the statutory liability shield generally does not extend to tax obligations of the partnership, which remain enforceable against partnership property and, depending on the province, against partners.

WORKERS' COMPENSATION FOR PARTNERS

• Partners are generally not automatically covered by provincial workers' compensation as they are not workers under the statute.

• Most boards permit partners to purchase optional coverage, such as optional insurance from the Workplace Safety and Insurance Board in Ontario and Personal Optional Protection from WorkSafeBC.

• In certain high-risk industries, including construction in Ontario, coverage is mandatory for partners as well as employees.

PROVINCIAL AND TERRITORIAL PAYROLL OBLIGATIONS FOR EMPLOYEES

• Ontario: Employer Health Tax (0.98% to 1.95%; $1,000,000 exemption for eligible employers with payroll of $5,000,000 or less); WSIB; minimum wage $17.95.

• British Columbia: Employer Health Tax (exempt to $1,000,000; 5.85% on payroll between $1,000,000 and $1,500,000; 1.95% on total payroll above $1,500,000); WorkSafeBC; minimum wage $18.25.

• Quebec: Health Services Fund (1.65% to 4.26%); CNESST labour standards contribution and workplace health and safety premiums; Workforce Skills Development and Recognition Fund for payroll above $2,000,000; QPIP employer premium 0.602%; minimum wage $16.60.

• Manitoba: Health and Post-Secondary Education Tax Levy (4.3% above the exemption and 2.15% on total payroll above the upper threshold); Workers Compensation Board; minimum wage $16.40.

• Newfoundland and Labrador: Health and Post-Secondary Education Tax (2% above $2,000,000); WorkplaceNL; minimum wage $16.35.

• Northwest Territories and Nunavut: 2% payroll tax withheld from employee remuneration; Workers' Safety and Compensation Commission; minimum wage $17.20 and $20.17 respectively.

• Alberta ($15.00), Saskatchewan ($15.70), New Brunswick ($15.90), Nova Scotia ($17.00), Prince Edward Island ($17.30), and Yukon ($18.51): no provincial payroll tax; workers' compensation premiums payable to the provincial or territorial board.

SOURCES

• Canada Revenue Agency, Guide T4001 Employers' Guide: Payroll Deductions and Remittances.

• Canada Revenue Agency, Guide T4002 Self-employed Business, Professional, Commission, Farming, and Fishing Income.

• Employment and Social Development Canada, EI Special Benefits for Self-employed People.

• Canada Pension Plan, s. 10 and Part I, Division C; Employment Insurance Act, s. 5(2)(i) and Part VII.1.