There is no greater change in payroll than a change in payroll frequency, so changes that affect how and when employees get paid must be handled with special care. Mid-year changes in payroll frequency can affect the amount of CPP or QPP source deductions. Explaining this first requires that we review three topics, the Basic Exemption, how pay periods are defined and how we count the number of pay periods in the year, for source deduction purposes.

For both CPP and QPP, the BE is fixed by statute at $3,500 per year. There is also a BE fixed for each different pay period type. For semi-monthly periods this is $145.83 and for bi-weekly periods, when there 26 periods in the year, $134.61. Even when the annual BE might be prorated, such as for turning 18 in the year, pay period BE amounts don’t change.

Two basic attributes define pay periods: the number of days included; and the gap, if any, between the last day covered by a pay period and its related pay date.

Semi-monthly and monthly pay periods fix the days included as specific days of the month, such as the 1^{st} to 15^{th} and the 16^{th} to last day of the month for semi-monthly periods. By contrast, weekly and bi-weekly pay periods start and stop on the same day of the week. It’s common for employers to define bi-weekly pay periods as starting on a Sunday and ending on the Saturday, the week following. This is a best practice, since it simplifies employment standards and EI compliance.

Semi-monthly and monthly pay periods are almost always defined as having no gap between the last day covered and the related pay day. For these, pay day is usually the last working day in the period, not necessarily the last calendar day. For example, the typical pay date for semi-monthly and monthly payrolls would be Friday, September 28, even though the last day in those would be Sunday, September 30, 2012. On the other hand, there is much more often a gap between the last day in each period and its pay day, for weekly and bi-weekly payrolls. This gap is designed to provide payroll with sufficient time to process pay exceptions, such as overtime, up to and including the last day in each period.

The common term for not having a gap between each period end and its pay day is “paying current”, while a having such gap is commonly termed “paying in arrears”. When paid in arrears, employees may already have started work in the next pay period before being paid for the last one. Such days already worked in the next period are “in arrears” on pay day.

The count of pay periods is always based on the number of pays falling within the calendar year. Semi-monthly and monthly payrolls always have the same number of pays each year. By contrast, there can sometimes be 53 weekly or 27 bi-weekly pays in the year, since calendar years aren’t based on an even number of 7 day weeks (7 times 52 equals 364, not 365 or 366, for leap years).

Putting all this together we can see potential problems for CPP contributions when changing pay frequencies mid-year.

If the change is from a semi-monthly or monthly period to a weekly or bi-weekly one, the risk is that the number of periods in the year will be reduced. The reason is that most semi-monthly or monthly payrolls are paid on a current basis, while most weekly or bi-weekly payrolls are paid in arrears. If the last semi-monthly pay date is Friday, September 28, 2012, new bi-weekly periods start Sunday, September 30, and the new bi-weekly pay day is the Thursday following each pay period end, the first bi-weekly pay day would be October 18, 2012. In this scenario, there are 18 semi-monthly pay periods and 6 bi-weekly periods in the year. At $145.83 and $134.61 respectively, the pay period BE applied would be $3,432.60, not the full year’s $3,500.

The opposite happens for switches from weekly or bi-weekly payrolls to semi-monthly or monthly ones, again because of the difference between paying current and in arrears. If the last bi-weekly pay period, ended Saturday, September 29, 2012, was paid on Thursday, October 4, and a new semi-monthly payroll frequency began October 1, paid on a current basis, there would be only 11 days between the last bi-weekly pay date and the first semi-monthly one. In this scenario, there would be 21 bi-weekly and 6 semi-monthly pays, for a total of 27, resulting in $3,701.79 in BE for the year.

If employers change pay frequencies mid-year, particularly when this involves a change between paying current versus in arrears, there are going to be difficulties with CPP or QPP calculations. These difficulties are limited to employees who don’t hit YTD maximums and are based on the amount of BE over or short at year-end. Since every $1 of BE over or short varies the CPP or QPP contributions required by roughly 5 cents (at 4.95% for CPP and 5.025% for QPP), any contributions over or short will be no more than $5 or $10 per employee for the year.

Given these difficulties, the best practice is to ensure that changes in pay period frequency happen, starting with a new tax year. If that’s not possible, there is really no good way to adjust the amount of BE applied on a pay period basis, that would take into account all possible variations, such as the impact on employees who don’t work a full year. If other reasons compel such a mid-year change, then it’s probably best not to do anything to compensate, at least for CPP or QPP source deductions. If a PIER, or its equivalent Revenu Quebec, assessment results, given the relatively small amounts involved, it’s probably best to just pay the balance owing.

The only way to adjust CPP or QPP contributions on a pay period basis, for a mid-year frequency change, would be to vary from the pay period BE amounts set by regulation. Since the employer’s authority to take CPP or QPP source deductions is based on the pay period BE amounts set by regulation, varying from these could result in problems. If pay period BE amounts are set lower than in the regulations, the effect would be to take more CPP or QPP contributions than required. Without each employee’s written consent, there would no no authority for such excess contribution. This would be in effect a failure to pay employees the full amount of their wages owing. If the pay period BE amounts are set higher than those in the regulations, CPP or QPP pay period contributions would be less than required, meaning a potential failure to deduct and remit.

*Alan McEwen is a payroll consultant and freelance writer with 20 years’ experience in all aspects of the industry. He can be reached at *armcewen@cogeco.ca*, (905) 401-4052 or visit *www.alanrmcewen.com* for more information. This article first appeared on Canadian HR Reporter and Canadian Payroll Reporter on November 19, 2012.
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