Many Ontario businesses shut down for a week or two over the holidays, gifting their employees paid time off as a thank-you for the year’s work. Staff appreciate this gesture, but business owners and payroll managers must report these payments correctly to avoid confusion or compliance issues—especially with Employment Insurance (EI), Canada Pension Plan (CPP), and T4 preparation. Here are some payroll tips to guide you through paid holiday closures.
How to Handle Paid Holiday Closures
When employees receive their regular pay during a holiday closure (e.g., Christmas to New Year’s), you must treat this time as insurable and pensionable employment. That means:
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CPP and EI still apply: Even though employees are not physically working, you must continue to withhold and remit CPP contributions and EI premiums on these wages.
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Wages are treated as regular earnings: Do not code this paid time off as vacation pay or a bonus unless it’s actually vacation entitlement being paid out.
Reporting Requirements
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Record of Employment (ROE): If you later issue an ROE—due to resignation, layoff, or other termination—you must accurately reflect paid time off. Employers do not consider paid holiday shutdowns a break in employment or unpaid leave, so they don’t need to issue an ROE.
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Box 14 on the T4 slip: Report the paid closure time as part of the employee’s total employment income. There’s no need to separate it out unless you’re specifically paying out unused vacation pay or a bonus.
Best Practice
Clarify with your accountant or payroll provider whether the paid time off falls under regular wages, vacation entitlement, or a bonus structure. The classification matters when it comes to year-end slips, audits, or EI claims.
Need guidance on how to properly structure your payroll over the holidays? Compass CPA can help ensure your year-end payroll processing keeps you compliant and your employees happy. Reach out before your December payroll run to avoid surprises in January!
