Vacation pay rules for employers: accrual, pay-as-you-go and the year-end treatment

Vacation pay looks trivial until the first time an employee leaves and the payout is larger than anyone expected. It is really two rules stacked on top of each other: a provincial entitlement that decides how much is owed and when, and a federal payroll rule that decides how it is withheld on and reported. Small employers tend to get the first roughly right and the second quietly wrong.

What B.C. requires

Two entitlements run in parallel and they are not the same thing.

Vacation time. Employees earn vacation during their first year. After 12 months they get two weeks of annual vacation; after five years, three weeks. Vacation must actually be taken within 12 months of being earned — an employee cannot simply skip the time off and collect the money instead.

Vacation pay. At least 4% of all wages paid in the previous year, rising to at least 6% once the employee completes five years of employment. Total wages for this purpose include regular wages, salary, commissions, statutory holiday pay, paid sick days required by employment standards, and previously paid vacation pay — which is why the base grows slightly each year.

An employee employed for five calendar days or less is not entitled to vacation pay. Agreements that give more than the minimum are enforceable, so if your offer letter promises three weeks from day one, that is the standard you are held to.

Accrual versus pay-as-you-go

There are two legitimate ways to run this in B.C.

Under the accrual method, vacation pay builds up as a liability and is paid at least seven days before the employee starts their annual vacation. This is the default. It matches the cash outflow to the time off, and it means the balance sheet carries an accurate picture of what you owe.

Under pay-as-you-go, the 4% or 6% is added to every cheque instead. B.C. allows this only if the employee and employer agree in writing. It is administratively simpler and keeps the liability off the books, but it has a real drawback: the employee still has to take the vacation time, and by then the money is spent. It also does not remove the requirement to settle any shortfall when employment ends.

Whichever route you choose, apply it consistently and document it. A verbal “it's included in your rate” is not the written agreement the Act contemplates.

The payroll treatment

This part is federal and applies in every province. Vacation pay is employment income reported in box 14 of the T4 in the year it is received, with EI insurable earnings in box 24 and CPP pensionable earnings in box 26. What changes is how the deductions are calculated:

• Paid while the employee is on vacation leave. CPP contributions and EI premiums are calculated exactly as they would be on regular salary. For income tax, use the table for the vacation period if you pay it separately, or the regular pay period if it goes out with other earnings.
• Paid out without leave, or paid continuously on every cheque. Income tax is calculated using the bonus or irregular payment method, and — the part most often missed — CPP is also calculated using the bonus method. EI premiums are still calculated as for regular salary.

Getting the method wrong does not usually change the employee's final tax bill, but it does change what you remit in the period, and remittance mismatches are what prompt letters. If you are unsure which stream you are in, the same discipline that governs taxable and non-taxable benefits applies: characterise the payment first, then withhold.

What to carry at year-end

If you accrue, the vacation pay liability belongs on the balance sheet at your fiscal year-end, measured against actual wages paid in the entitlement year rather than a rule of thumb. Two practical points. Vacation pay owing is not the same as vacation time owing — an employee can be current on one and behind on the other. And the accrual is a real cash commitment, so it belongs in the cash-flow view alongside your source deduction remittances, not filed away as a bookkeeping formality.

Under pay-as-you-go there is normally nothing to accrue, but you should still be able to show, employee by employee, that the percentage actually went out on every cheque. That reconciliation is a five-minute job during your payroll year-end checklist and a very unpleasant one two years later.

When employment ends

All remaining vacation pay is owed on the final cheque, with 4% still due to someone who has been there less than a year. That payout lands inside the same 48-hour window as the rest of the final wages — see final pay on termination for the full sequence.

The bottom line

Decide deliberately between accrual and pay-as-you-go, put the choice in writing if it is the latter, use the right deduction method for the situation, and carry an honest liability if you accrue. Those four things keep vacation pay from becoming a surprise. If you are hiring for the first time, our first-employee checklist sets the rest of the payroll file up alongside it.

This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and your situation is unique — please speak with a CPA before acting on anything here.

Working through this locally? We advise owners on it as an accountant in Abbotsford.