In contrast to other jurisdictions where a payroll tax may be levied on employers, both the Northwest Territories and Nunavut impose a payroll tax directly on employees working in those territories. The Payroll Tax Act came into effect in the Northwest Territories in 1993 and was duplicated for Nunavut upon division of the territories in 1999. Both territories review and update the regime on an ongoing basis.

Any employer who pays an employee for work performed in the Northwest Territories or Nunavut is required to register under the respective legislation. The employer is required to withhold the prescribed tax from the pay of affected employees and remit the tax directly to the Government of the Northwest Territories or the Government of Nunavut. Annual filing requirements also apply.

Payroll tax is calculated as 2% of the employee’s gross remuneration earned for work in the Northwest Territories or Nunavut. Remuneration includes salary, wages, bonuses, taxable allowances benefits, and retiring allowance or severance pay. The tax applies to any employee who works, provides services, or performs duties in the Northwest Territories or Nunavut, regardless of the actual place of residence of the employee. The tax does not apply if the employee earns less than $5,000 in a calendar year in the Northwest Territories, but the tax is payable on all earnings if the employee earns more than half of his employment earnings in the Northwest Territories.

Although payroll tax is levied on the employee, significant fines and penalties can be imposed on an employer for failure to comply with the legislation. Failure to collect or remit tax can result in a penalty of up to 20% of the tax that should have been collected or remitted.