What is vacation pay versus regular pay?

Vacation pay is remuneration for time off! The Ministry of Labour, through the Employment Standards Act, allows for 2 weeks of paid vacation per year worked. This is the legal minimum — and many employers offer their employees more than the standard 2 weeks, often to reward long service with the company.

The 2-week amount is often expressed as 4% of your regular pay. (Out of 52 weeks in the year, you work 50 and go on holiday for 2; the 2 weeks is 4% of the 50.) If you’ve worked less than a full year, the amount of paid vacation you receive is pro-rated accordingly. So, summer students, for instance, would receive vacation pay amounting to 4% of their summer earnings.

Visit this Q & A for methods on calculating vacation pay. Vacation pay is treated in the same manner as regular pay in terms of tax, EI, and CPP deductions.

Visit the Ministry of Labour website for more information on vacation pay in Ontario, or find a comparable government resource for your location.

How do I calculate vacation pay for my staff?

Updated January 2018

There are 2 methods to calculate vacation pay: you can include vacation pay in each paycheque, or your can pay it out in a lump sum when employees take their holiday (or when their contract ends). For our examples, let’s assume an employee receiving the Employment Standards Act minimum of 2 paid weeks per year worked, or 4% of earnings. (Update as of January 2018: Under the ESA employees who have seniority of 5 years or more are entitled to 3 paid weeks per year worked or 6% of earnings).

Method 1 – Pay with each cheque:

Vacation pay can be rolled into regular pay, so the employee receives it as they earn it. This means that the employee has to do their own saving-up for time off. This method is often used for part-timers, temporary and hourly-paid staff.

Example: An employee earns $1,000.00 per pay cheque. The employee has vacation paid on each cheque, therefore they receive $1,000.00 in pay + 4% ($40.00) for a total of $1,040.00 of gross pay each pay period. If they have seniority of 5 years or more, they would receive $1,000,00 in pay + 6% ($60.00) for a total of $1,060.00 of gross pay each pay period).

Method 2A – Pay with holiday – Salary:

Salaried employees get “paid vacation”, which means they receive their normal salary without interruption even when on vacation. There is no change in the rate or frequency of their pay; they just get paid time off. In the payroll records, 4% vacation pay is accrued each week. (For employees with 5 years or more of seniority, it would be 6%). That is, the employer sets aside the vacation pay amount as money owing to the employee for their holiday. Since the process is seamless for both the employer and the employee, the accrual process may be omitted: if the employee gets their regular pay, the requirements have been fulfilled!

Method 2B – Pay with holiday – Non-Salary:

Part-time, casual and hourly-paid staff often have an irregular stream of earnings. From the employer’s viewpoint, the accounting is the same: you accrue 4% of each week’s earnings, setting it aside as an amount owed to the employee. (Again, this would be 6% for employees with 5 years or more in seniority). However, when the employee takes time off, their vacation payout will not correspond to a normal paycheque — so from their point of view vacation pay is a lump sum.

Example: The employee is about to take her/his annual vacation, and no vacation pay has yet been paid. Therefore, the employer bases vacation pay on the employee’s total gross pay since the last time they took vacation. In this case, the employee has earned $13,978.65 in gross earnings since his or her last vacation. 4% of those gross earnings warrants vacation pay of $559.15.

Visit the Ontario Ministry of Labour website (or a comparable website for your area) for more information on vacation pay.

Should I charge tax on vacation pay?

Yes. CPP, EI, and taxes are deducted from vacation pay in the same manner as with regular pay.

Sage announces product name changes

Staff Post
By Anna Mathew

Sage, the makers of Simply Accounting, have announced several brand changes, including a new naming structure for their products.

What’s changing?

From the Sage website:

In 2012 the names of many of our core accounting and ERP lines, including those designed for nonprofits and the construction industry, are changing. These products will be identified with a numbering approach where higher numbers denote increasing levels of product capability or sophistication. Our product numbering sets include Sage One, Sage 50, Sage 100, Sage 300, and Sage 500.

However, these changes are more than in name alone. Each product family will offer integration to common business solutions such as CRM, Fixed Assets, HRMS, and Payroll. Sage Connected Services provide additional capabilities, including online payment processing, mobile access, and data security, while product support through Sage Business Care and Sage Advisor technology ensure you get the most from your Sage investment.

You can read more at the new Sage website.

I received a grant to help with my capital asset purchases. My bookkeeper says this is a liability. How does this make sense?

Your bookkeeper is correct. But, before you try to come to grips with the treatment of the capital grant, it will help if you review the depreciation of capital assets, explained in this FAQ.

Donations to a capital campaign (e.g. from individuals and businesses) are treated in the same way as grants (e.g. from foundations and governments).

Your funders and donors have provided money that is intended to benefit your organization over the life of the capital purchases. In the same way that the cost of a capital asset is spread over the years of ownership, the benefits of a capital grant must be spread over the same years, using the same technique.

A typical name for this item is “Deferred Contributions for Capital Assets,” and it appears with other deferred revenues in the liability section of the balance sheet.

You should discuss your organization’s capital policies with your accountant, to make sure they are appropriate to your particular situation.

Does an audit mean that my statements are correct?

Auditors are engaged to express an opinion on the quality of your financial statements. A typical positive audit opinion will say that your statements present your financial position “fairly, in all material respects.”

This isn’t the same as being free from error!

Straight from the CICA Handbook (Canadian Institute of Chartered Accountants): “An item of information, or an aggregate of items, is material if it is probable that its omission or misstatement would influence or change a decision.”

As part of their audit, your accountant makes a determination on what amount is material for your organization. They assess any errors they identify relative to this materiality threshold. Thus, they may pass small errors without making corrections.

This would be a good point to discuss with your auditor, so that you understand their process around addressing any bookkeeping errors they find.