Overtime and Tax in Canada: Common Misconceptions Debunked

One of the best perks of running a small business is the close relationships you build with your employees. After all, you work together every day, and you know you can rely on them to show up when you really need them. It’s like having a second family, right?

The flip side is that you’re there for them, too — doing everything you can to make sure your workers are taken care of financially. So it can be super stressful when one of your employees is standing in your office with their pay stub demanding to know why you taxed them so much after they worked all that overtime.

Now your employee is convinced that they’re being charged a special “overtime tax,” and you need to talk them through what’s going on with their overtime compensation. It can be a tricky conversation to handle, but don’t sweat — we’ve got you covered!

Here’s everything you need to know about overtime pay and its tax misconceptions.

Understanding overtime pay in Canada.

Okay, before we break down what overtime is, let’s start by addressing the elephant in the room: There’s no special tax for overtime. No special rules. No hidden rates. It gets taxed exactly the same way as regular pay, regardless of how many hours your employees put in.

Ahem. Now that’s out of the way, let’s take a closer look at what overtime means.

What constitutes overtime?

In broad terms, overtime can be defined as the number of hours worked in excess of normal working hours. So, for example, if an employee usually works a 40-hour week, the 41st hour (and every hour thereafter) potentially needs to be paid as overtime.

Another difference is that the hourly rate paid for overtime is higher than the rate paid for regular pay. So your employees might be getting “time and a half,” if you’re paying one and a half times (1.5 times) their normal hourly rate, or even “double overtime” if they’re getting paid twice the normal rate (2.0 times).

Great, that’s pretty straightforward. There’s no special overtime tax, and the more hours they work, the more they get paid. We’re done here, right? Well… not quite yet. The thing is your overtime pay rates also depend on where in Canada your business is located.

Federal and provincial regulations and calculations

With the exception of industries regulated by the federal government (for example, banks), the number of hours employees can work before it’s considered overtime varies based on the province or territory where your business operates. Your local laws and regulations will also dictate how you should calculate overtime pay.

In most areas, it’s considered to be overtime after 40 hours of work, but if you’re in Nova Scotia, for example, it’s only overtime after 48 hours. And the rate is 1.5 times an employee’s regular wage for every hour worked over that. So, an employee earning $18 per hour who worked 50 hours over the last work week would get paid:

(48 x $18) + (2 x $27) = $918 for the week

However, if you’re in British Columbia, and your employees work really long days, you could be looking at paying both time and a half and double overtime. That is, you would need to pay 1.5 times their rate for anything above eight hours, and then double their normal rate for any hours worked over 12 in a single day.

Other provinces that have their own specific overtime laws include New Brunswick and Newfoundland where the overtime pay rate is tied to minimum wage, rather than the employee’s regular rate.

What those variations mean in practical terms is that you, as an employer, need to make sure you’re up to date on the applicable laws and employment standards for your province.

Overtime in Canada: Common misconceptions.

Okay, so we’ve covered what overtime is, how you calculate it, and the first rule of overtime tax club: We don’t talk about special overtime tax. Because there isn’t any.

But as you may already know, there are a few other common misconceptions that tend to creep in when you’re dealing with people’s salaries. Let’s take a look at the big ones.

Overtime pay and “double taxation”

Probably the most common thing small business owners hear from their employees when they’ve worked longer than their regular shifts is, “I’ve been taxed twice! I pulled all these extra hours and only earned a little more than usual!”

What’s happening here is that, because your workers put in the extra work, they’ve earned much more money (yay!). But this also means they get taxed more because now they’re in the tax table big leagues, and some of that extra money is getting taxed at a higher rate (boo!). In other words, their pay stub shows that they are paying double the amount of tax, but that’s only because their overall income is being charged at a higher rate in a new income tax bracket.

In short, there’s no double taxation.

Overtime pay considered as a bonus

The next misconception is usually more on the employer’s end: the idea that overtime pay can be treated as a bonus. Well, this depends on when an employee is paid for overtime hours. If it’s paid in a later pay period, go ahead and consider it as a bonus and make deductions on the amount paid.

Here’s the thing: Generally speaking, any hours your employees have worked as overtime cannot be recorded and paid as a bonus because a bonus doesn’t have hours attached to it. Overtime does!

Why is this important? Because hours worked as overtime are insurable. Meaning that they count towards calculating Employment Insurance and, therefore, they form a part of the benefits your employee would get if there was an interruption in their employment.

What you can do, though, is bank hours. Any overtime hours that aren’t paid out in the same pay period in which they were worked are considered banked time. This means they can be paid out in the next pay period or another future period. In most cases, these hours are “paid back” as time off, though they can also be paid out later.

It’s worth noting that, as with hours of overtime and rates, the rules around how additional time can be banked and paid also vary from province to province. So you’ll need to take a look at the regulations for your area to make sure you’re doing things the correct way.

Making overtime easy

As a small business owner, dealing with overtime and the questions that arise from it can be tricky, especially when your employees are genuinely upset because they believe they’ve been taxed unfairly. Now that you’ve got this information about overtime rates, treating overtime hours as bonuses and so on, there’s hopefully less confusion all around.

The good news is, using a payroll platform can take it a step further and really help you simplify the process of calculating overtime, and make it much easier to show your employees exactly what’s going on. So you can get back to doing what really matters: making sure your business and your people are thriving.

Interested in learning more about how Wagepoint’s payroll solution simplifies overtime? Get started!

Additional reads.

Employment Standards Act by Province/Territory

• Alberta Employment Standards
• British Columbia Employment Standards
• Manitoba Employment Standards
• New Brunswick Employment Standards
• Newfoundland Employment Standards
• Northwest Territory Employment Standards
• Nova Scotia Employment Standards
• Nunavut Territories Employment Standards
• Ontario Employment Standards
• Prince Edward Island Employment Standards
• Québec Employment Standards
• Saskatchewan Employment Standards
• Yukon Territory Employment Standards

Written by Ethan Babcock

Ethan Babcock is a Product Marketing Manager at Wagepoint. He enjoys chatting with payroll aficionados, collaborating with different teams across Wagepoint, and sending (hopefully humorous) gifs throughout the day. When he isn’t working, he enjoys being outdoors, reading, or trying out a new bread recipe.

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