There are many benefits to expanding your global workforce and hiring employees in Canada. In addition to its close proximity and similar time zones to the United States, Canada offers a diverse and skilled talent pool. With English as the primary language, the Canadian market, business practices, and cultural norms are very similar to the U.S.
Can a U.S. company hire an employee in Canada?
Yes, U.S. companies can hire Canadian employees. While hiring in Canada can positively contribute to your company’s growth, productivity, and talent pool, there are many complexities to hiring in a new market—especially if your company doesn’t have an entity in Canada. A U.S. company must comply with Canadian tax laws and labor, employment, and payroll regulations to hire and pay employees in Canada.
The following guide outlines your options for hiring and managing payroll for Canadian talent, along with the compliance risks when engaging with a foreign workforce.
How do U.S. companies hire and pay employees in Canada?
How you hire and pay Canadian talent depends on several factors, including the number of employees you plan to hire, cost considerations, time commitment, and your overall strategic business plans in the country. There are three options for hiring and paying talent in Canada:
1. Set up a foreign entity in Canada
Having an entity in Canada allows you to create a branch or subsidiary and hire employees directly. It gives your company full autonomy to hire employees and run payroll, establish a reliable local branch, and deal with fewer employment costs in the long run.
Setting up a foreign entity is a good option if you plan to hire a large Canadian team or establish a long-term presence in Canada.
However, setting up an entity is an extensive, costly, and time-consuming process. It requires in-country expertise and knowledge of Canada’s legal, corporate, and payroll regulations. Establishing an entity may not be worthwhile if you only plan to hire a small number of employees.
2. Partner with an employer of record in Canada
If you don’t plan to own an entity in Canada, you can partner with an employer of record (EOR) to hire, pay, and manage your Canadian workforce. An EOR partner in Canada is already set up as a legal entity and ensures that you stay compliant with the local labor requirements. Some EOR solutions also offer global payroll and global mobilityfor your supported employees.
Ultimately, an EOR streamlines the employee onboarding and payroll process so that you can support your Canadian team and prioritize your company’s growth.
Learn more: What Is an Employer of Record (EOR)?
3. Engage Canadian talent as contractors
Companies looking to quickly build their Canadian team may choose to hire and pay Canadian contractors instead of hiring employees. A contractor provides their services as a self-employed individual, allowing companies more flexibility and cost savings when targeting specialized services or one-off projects.
As with the U.S., a Canadian contractor is treated independently from a company’s employees. A company that engages with a contractor does not pay them a fixed salary, provide work equipment, or control their schedule and work methods.
Still, while engaging international contractors has its benefits, foreign companies risk misclassification and could face back pay, back taxes, and other legal penalties. We cover the risk of misclassification in more detail below.
How much does it cost to hire an employee in Canada?
The cost of hiring an employee in Canada is, at minimum, equal to the employee's gross salary plus mandatory employer payroll contributions. However, mandatory payroll contributions vary across Canadian regions.
For example, employers who hire employees in Quebec must contribute taxes to various federal schemes, such as Employment Insurance, Workers' Compensation, and the Provincial Health Fund, while also contributing taxes to Quebec-specific schemes, such as the Quebec Pension Plan and the Quebec Parental Insurance Plan.
Compliance risks when paying employees in Canada
Managing payroll for your Canadian workforce requires an understanding of the local tax laws and labor rules. Navigating payroll in a different country is a complicated process and, if done incorrectly, can lead to fines, legal fees, and compliance issues. Below are some risks to consider:
Incorrect payroll contributions
Calculating payroll contributions can affect your Canadian employee’s take-home pay, statutory employee benefits in Canada, or pension funds. To ensure payroll compliance in Canada, an employer must factor in the following contributions for their employee:
- Pension
- Employment Insurance
- Provincial Health
- Worker’s Compensation
- Vacation Accrual
Learn more: Complete Guide to Payroll and Taxes in Canada
Permanent establishment
If your company has a fixed location in Canada and it is also generating revenue, you have a permanent establishment and are liable to local Canadian taxes.
Having an ongoing and stable presence in another country can be beneficial, but it’s important to understand the local corporate tax rates that come with a permanent establishment. Failure to discern permanent establishment can lead to risks, including unpaid taxes, interest and penalties, employer liabilities, and legal issues.
Misclassification risk
Improper classification is more of a risk if a company decides to engage contractors instead of hiring employees. When engaging with Canadian contractors, a U.S.-based company must consider tax laws and reporting in both the U.S. and Canada to avoid misclassification. Misclassification leads to legal issues, fines, social contribution, and employee entitlement back pay.
Learn more: How to Avoid the Risks of Independent Contractor Misclassification
Employment law variance in different provinces
Employment laws differ between Canada’s provinces and territories. If your workforce is located in more than one Canadian province, payroll requirements vary and can cause non-compliance. Paid time off (PTO), severance payments, workers' compensation, and payroll contributions are all factors that may fluctuate depending on the location. For example, the minimum wage varies between provinces, ranging from $11.75 (Canadian dollars) in New Brunswick, $13.50 in Quebec, to $16.00 in Nunavut.
Learn more information in our complete guide toCanadian employment laws.
How to hire and pay talent in Canada compliantly
Tapping into the Canadian market is a savvy move toward growing your global workforce. With that comes many considerations and challenges to ensure your U.S.-based company stays compliant with Canada’s unique rules and employment regulations.
An experienced global partner like Velocity Global simplifies the process of building distributed teams in Canada and more than 185 countries by eliminating the hurdles of setting up foreign entities. With our EOR solution, we take the risks out of the equation and help you onboard, pay, and manage global employees while ensuring compliance.
Looking to quickly and compliantly build a team in Canada or beyond? Connect with Velocity Global today.
