Calculating the amount of vacation entitlements in Canada doesn’t have to be confusing. Still, many small business owners miscalculate because vacation pay varies by province, employee type, and even by collective agreement.
This guide explains everything you need to know — from federal rules to easy calculation methods for salaried and hourly employees — so you stay compliant and confident across provinces.
What Is Vacation Pay
Vacation pay is the money employers must pay when employees take employee vacation, accumulate unused vacation, or leave the company. It’s a core vacation benefit entitlement under employment standards in every province.
It’s calculated as a vacation pay percentage of gross wages — your employee’s total pay (including commission income, overtime, and bonuses). This ensures employees receive pay for each week of vacation pay or days of vacation earned through their period of employment (typically tracked over a 12-month period called the “vacation entitlement year”).
Typical vacation pay entitlements are:
- 4% (2 weeks) after 1 year of employment
- 6% (3 weeks) after 5 years
- 8% (4 weeks) after 10 years
- Employees begin accruing vacation from their first day of employment, and their entitlement grows with their months of employment and total period of employment.
What’s Included in Vacation Pay
The amount is based on the employee’s gross earnings — meaning regular earnings received for work performed at the regular rate. Include:
- Regular hourly or salaried pay
- Overtime pay
- Commission income and performance bonuses
- Statutory or public holiday payments
- Shift premiums
- Piecework or production pay
- These all represent compensation for active work — the foundation for calculating the correct vacation pay across provinces and in Quebec’s legal framework.
What’s Not Included in Vacation Pay
Here’s where employers must be careful. The following payments must be excluded from the gross wage base when determining entitlement to vacation time or the days of vacation available in a year.
- Reimbursements and allowances
- Anything paid to cover business costs or tools isn’t part of earnings.
- Examples include: meal, mileage, hotel, or parking reimbursements; tool or equipment allowances; travel per diems. These are cost recoveries, not wages.
- Employer-paid benefits
- Perks that aren’t direct compensation don’t count: employer contributions to health, dental, or RRSP plans; group insurance premiums; the value of a company car or phone for personal use. Even if taxable, these aren’t “vacationable” earnings.
- Termination-related payments
- Vacation pay applies to earned wages, not one-time severance. Exclude indemnity in lieu of notice, severance pay, and retirement or end-of-service bonuses. (You still owe the correct amount on regular wages earned before termination and any vacation to employment termination payout required by law.)
- Unused sick or personal day payouts
- If your company pays out unused sick/personal days at year-end, that payout isn’t part of the entitlement. It’s discretionary.
- Tips and gratuities (not employer-controlled)
- Tips received directly from customers — not processed through payroll — are excluded. Only employer-controlled tip pools distributed through payroll count.
- QPIP, EI, and other social benefits
- When an employee receives payments through government programs (e.g., maternity, parental, or caregiving benefits), these are not wages. Vacation time may continue to accrue, but pay does not.
- Bonuses unrelated to performance
- CNESST and other regulators distinguish between performance-based bonuses (included) and non-performance bonuses (excluded, e.g., a Christmas gift or signing bonus).
- Unpaid vacation or other leaves
- During unpaid vacation, unpaid parental, or personal leave, no wages are earned. Employee entitlements to vacation time may continue to accrue under local rules, but no additional vacation pay is calculated.
- Retroactive or lump-sum adjustments
- Retroactive raises may be excluded if not directly tied to hours worked, depending on your payroll setup and regulator interpretation.
Federal Requirements
Under the Canada Labour Code, federally regulated employees (banks, telecoms, airlines, and transportation companies) receive:
- 2 weeks (4%) after 1 year
- 3 weeks (6%) after 5 years
- 4 weeks (8%) after 10 years
The amount must be paid:
- Before the vacation period starts, or
- On each regular pay if accrued automatically.
These are baseline vacation benefit entitlements — provinces can (and often do) go further, especially around calculation of vacation pay for specific roles or pay structures.
Provincial Requirements
Each province’s Employment Standards Act (ESA) or equivalent legislation defines local rules for annual vacations, vacation pay percentage, and timing.
| Province / Territory |
Vacation Time |
Vacation Pay Rate |
| Ontario |
2 weeks after 1 year; 3 after 5 |
4% → 6% |
| Quebec |
2 weeks after 1 year; 3 after 5 |
4% → 6% |
| British Columbia |
2 weeks after 1 year; 3 after 5 |
4% → 6% |
| Alberta |
2 weeks after 1 year; 3 after 5 |
4% → 6% |
| Saskatchewan |
3 weeks after 1 year; 4 after 10 |
6% → 8% |
Always verify your local vacation policy or collective agreement — they may extend entitlements or define special rules for general holidays and unpaid vacation. These details can affect the calculation of vacation pay, especially if your employee’s period of employment includes breaks or maternity leave.
Ontario Example (ESA Reference)
In Ontario, the ESA requires:
- 2 weeks (4%) after one year of continuous employment, and
- 3 weeks (6%) after five years.
The period of employment includes any protected leave (like parental leave). Vacation pay must be paid before vacation begins or on every pay if your policy accrues it continuously.
How to Calculate Vacation Pay for Salaried Employees
For salaried employees, use their yearly wages or monthly salary and apply the applicable vacation pay percentage.
Example:
Employee earns $60,000/year with a 4% entitlement.
→ $60,000 × 4% = $2,400 vacation entitlement per year
Employers can pay:
- With each paycheque (automatic accrual), or
- As a lump sum before the employee takes vacation.
If the employee leaves, any unused vacation time must be paid in their final pay — including any vacation to employment termination amount required by law. The calculation for salaried staff is tied to their period of employment, base salary at the regular rate, and eligible earnings.
Pro tip: Always calculate based on total gross wages, not just base salary. Bonuses, commissions, and overtime are part of the ESA’s definition of “wages.”
How to Calculate Vacation Pay for Hourly Employees
For hourly wage earners, the calculation methods depend on total gross wages and time worked.
Example:
Employee earns $40,000 in a year with a 4% rate.
Vacation pay = $40,000 × 4% = $1,600 vacation entitlement
You can:
- Add it to every paycheque (common practice), or
- Accrue and pay it when the employee takes their vacation time.
For shorter periods or new hires, prorate the amount based on their months of employment and period of employment. This ensures fairness and compliance when earnings fluctuate throughout the year.
In Ontario and most provinces, even part-time and seasonal workers earn vacation pay proportional to their total period of employment — whether they work 12 months or 3.
What About Shorter Periods and General Holidays?
If employees haven’t completed a full year, they still earn vacation pay proportionally to time worked.
Example:
6 months worked at $30,000 annual rate = $15,000 × 4% = $600 vacation pay.
General holidays (Canada Day, Labour Day, Thanksgiving) don’t reduce vacation pay — they’re separate entitlements unless your collective agreement or policy says otherwise. Always review the period of employment and leave type to avoid overlapping Employee entitlements.
If a general holiday falls during paid vacation, that day must be treated as a holiday — not a vacation day — and paid accordingly. Your statement of earnings (pay stub) should reflect both.
Handling Unused Vacation and Terminations
When an employee leaves, any unused vacation must be paid out — no exceptions.
This includes any vacation earned during their last period of employment, even if they didn’t complete a full year.
Example:
Employee worked 8 months at $50,000/year with a 4% rate.
$50,000 ÷ 12 × 8 × 4% = $1,333 vacation payout
Even partial months of employment create vacation entitlement. Under Ontario’s ESA and similar provincial laws, vacation pay is considered earned wages — failing to pay it can trigger employment standard violations.
Vacation Pay Percentage and Calculation Methods
The vacation pay percentage represents the portion of earnings owed as vacation pay:
- 4% = two weeks of vacation
- 6% = three weeks of vacation
- 8% = four weeks of vacation
There are two accepted calculation methods:
- Accrual Method – Vacation pay builds each pay period as a percentage of earnings.
- Best for hourly and variable-income employees.
- Fixed Method – Vacation pay is paid in a lump sum at set times (usually before vacation).
- Common for salaried or contract workers.
Choose the method that fits your operations — as long as the result meets or exceeds the vacation benefit entitlement set by law.
Tools to Calculate Vacation Pay
Manual spreadsheets are prone to errors, especially across multiple provinces. Modern tools automate the calculation of vacation pay and track everything by period of employment.
- Wagepoint – Built for Canadian payroll; calculates weeks of vacation pay entitlements automatically.
- Payworks – Excellent for CRA compliance and multi-province reporting.
- QuickBooks Payroll – Syncs your vacation policy with accounting, applying the correct vacation pay percentage by province.
Each acts as a reliable vacation pay calculator that applies provincial rules automatically — saving time, avoiding fines, and ensuring employees get their full entitlement.
Common Mistakes Employers Make
- Mixing up vacation pay and time off.
- Vacation time is the leave itself; vacation pay is the amount owed for that leave.
- Ignoring start dates.
- Entitlement accrues from the first day of employment, not January 1.
- Excluding bonuses and commissions.
- These count toward gross wages in every calculation of vacation pay.
- Forgetting part-year employees.
- Even short months of employment create prorated vacation pay obligations.
- Overlooking general holidays.
- A general holiday during vacation time cannot reduce earned vacation — it must be added as a separate paid day.
- Failing to update policies.
- If your business changes pay schedules or adopts a new collective agreement, update your vacation policy to stay compliant.
How to Never Calculate Vacation Pay Again
The fastest path to accuracy and compliance is automation.
Modern payroll systems:
- Track accruals automatically from each day of employment
- Apply correct vacation pay percentage based on period of employment
- Adjust for general holidays, unused vacation, and shorter periods
- Handle CPP, EI, and tax deductions automatically
- Generate ESA or provincial-compliance reports instantly
How to Pay Vacation Pay
Once you’ve calculated the correct amount, the next step is making sure vacation pay is paid at the right time, in the right way, and with the proper deductions.
Every province allows some flexibility — but only if your method is consistent and clearly stated in your vacation policy or employment contract.
Here’s what employers need to know:
1. When to Pay Vacation Entitlements
Depending on your payroll setup, vacation entitlements can be paid:
Option 1 — Each Pay Period (Accrued Method)
- You add the vacation pay percentage (typically 4% or 6%) to every regular pay.
- The employee sees their vacation entitlement as a separate line on each pay stub.
- This method is common for hourly or commission-based employees, because it’s simple and ensures pay keeps pace with earnings.
Example:
If an hourly employee earns $1,000 in gross wages per pay, with a 4% entitlement:
→ $1,000 × 4% = $40 vacation entitlement added to that paycheque.
Option 2 — Before the Vacation Period (Lump-Sum Method)
- You calculate the total amount owed and pay it just before the employee’s vacation begins.
- This approach is common for salaried employees or when vacation periods are pre-approved.
- It gives employees access to their full vacation income upfront, as required under the Employment Standards Act (ESA) and similar provincial laws.
Example:
A salaried employee taking two weeks of vacation at $60,000/year (4%) is paid $2,400 as vacation entitlement before the time off begins.
Option 3 — At Termination or Resignation
If an employee leaves your company, you must pay:
- Any unused vacation time
- All accrued vacation entitlement from their period of employment up to the last day worked
The amount must be included in the employee’s final pay, which is typically due within the statutory timeline (e.g., 7 days in Ontario).
2. How to Show the amount on the Pay Stub
Transparency is key. The ESA and similar legislation require employers to clearly identify vacation entitlement on each pay statement.
Each pay stub should include:
- Gross wages for the period
- Amount earned or paid
- Vacation pay percentage (e.g., 4% or 6%)
- The running balance of accrued vacation (if applicable)
This not only satisfies compliance but also helps employees understand how their vacation benefit entitlement is building up over time.
3. How to Handle Deductions and Tax
Vacation entitlement is taxable income — it’s treated the same as regular wages for:
- Income tax withholding
- Canada Pension Plan (CPP)
- Employment Insurance (EI)
- Provincial health or payroll taxes (if applicable)
You must apply all standard payroll deductions when paying vacation pay.
If the payment is made in a lump sum (instead of through regular payroll), most payroll software will automatically withhold the correct amounts using CRA’s bonus or lump-sum method.
Tip: In Quebec, vacation pay is also subject to QPP, QPIP, and Quebec income tax, so always verify that your payroll software uses Revenu Québec’s current deduction tables.
4. How to Pay During Leaves or Breaks in Employment
If an employee is on unpaid leave, their vacation time may continue to accrue depending on provincial law — but no vacation entitlement is earned during that period, because no wages are paid.
When they return to work, the calculation of vacation pay resumes based on their continued period of employment.
For example:
If an employee takes six months of parental leave, their period of employment remains unbroken (so entitlement years continue), but vacation pay only accrues once earnings resume.
5. Common Mistakes When Paying Vacation Pay
Avoid these pitfalls — they’re among the most frequent causes of ESA complaints and payroll audits:
- Combining vacation entitlement and regular pay incorrectly.
- Always show vacation entitlement as a separate line item; it cannot be “rolled in” without explicit employee consent.
- Paying late or after vacation.
- The ESA requires vacation pay to be paid before vacation begins (unless you pay it out with each pay period).
- Not paying on termination.
- You must pay all accrued vacation from the start of the period of employment — even if the employee hasn’t taken any vacation.
- Omitting tax deductions.
- Vacation pay is fully taxable; CPP, EI, and income tax must be withheld.
- Forgetting part-time or seasonal workers.
- Even short months of employment earn proportional vacation pay — no exceptions.
6. Best Practice: Use Payroll Software to Automate It
Manual payment tracking is one of the biggest sources of payroll errors.
Most modern systems — such as Wagepoint, Payworks, Humi, or QuickBooks Payroll — allow you to:
- Apply the correct vacation pay percentage automatically per employee
- Track vacation accrual by period of employment
- Flag when vacation pay must be paid before time off
- Generate reports showing accrued vs. paid amounts for compliance
Automation ensures you meet legal deadlines and pay vacation accurately, whether it’s part of every cheque or a lump-sum payout.
7. Employer Policy Options
Finally, clarify your payment method in writing. A good vacation policy should specify:
- Whether vacation pay is accrued each pay period or paid before vacation
- How general holidays during vacation periods are handled
- How unused vacation is carried forward or paid out
- The vacation entitlement percentage based on tenure or period of employment
Employees should acknowledge the policy on hire so everyone understands how and when vacation pay is handled.
Example: Putting It All Together
Here’s what this looks like in practice:
Employee: Full-time bookkeeper earning $50,000/year, employed for 2 years in Ontario
Vacation benefit entitlement: 2 weeks (4%)
Vacation pay percentage: 4%
Calculation of vacation pay: $50,000 × 4% = $2,000
Payment method: Accrued each pay
Display: “Vacation pay (4%) — $76.92” on each biweekly pay stub
If the employee leaves after 8 months, they still receive their prorated vacation entitlement for that portion of their period of employment, ensuring full ESA compliance.
Summary
In short:
You can pay vacation pay in three ways — each pay period, before vacation, or at termination — as long as:
- You use the correct vacation entitlement percentage (4%, 6%, or 8%)
- You calculate based on gross wages
- You include proper deductions
- You pay at or before the required time under provincial law
And if you automate it, you’ll never miss a calculation or payment again.
Final Word
Vacation entitlement isn’t just a formality — it’s a core vacation benefit entitlement that protects employees and builds trust.
By understanding the calculation of vacation entitlement for both salaried and hourly employees — and applying the right calculation methods based on each period of employment — you’ll stay compliant, efficient, and employee-friendly.
Whether you manage payroll in Ontario, Quebec, or beyond, the principle remains the same: track entitlements accurately, automate whenever possible, and make vacation pay something you never have to second-guess.
At Mesa CPA, we help small business owners integrate payroll tools like Wagepoint, QuickBooks Payroll, and Payworks — so you can stay compliant and spend less time on manual calculations.
If you’re ready to simplify your payroll and stop worrying about statutory holidays or vacation accruals, contact us for a quick compliance review. We’ll make sure every vacation period, deduction, and record meets standards — accurately and on time.