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What global businesses need to know about payroll in Canada.
Canada may be cold for much of the year, but from the perspective of incoming foreign investment, the opportunity is certainly hot.
Canada has a strong and dynamic economy and can be a great place to do business. Much like other developed nations, the country is dominated by the service industry making up nearly 75% of its workforce. With its stable economy and well-educated workers, Canada attracts businesses from around the globe.
Canada’s Gross Domestic Product (GDP) of just under US$2 trillion is only around 8.6 percent of the GDP of its primary trading partner, the United States. Despite this, Canada remains one of the world’s wealthiest countries and is estimated to be the tenth-largest global economy. And while its COVID response was relatively severe compared to some other countries, its economy has bounced back well.
The country’s transparent and efficient regulatory framework helps make opening a business within its borders a relatively straightforward process. The country is ranked 23rd in the World Bank’s global index for ease of doing business, ahead of other leading global economies like Japan and France. Canada also benefits from the North American Free Trade Agreement (NAFTA) with the United States and Mexico, and from income tax treaties with more than 90 countries around the world.
For growing U.S. companies, in particular, opening an office in Canada is often the first step to broader international expansion. But maintaining fully compliant Canadian operations can be complicated, due to the constantly shifting laws and payroll regulations that vary across the country’s ten provinces and three territories. Read on for a primer on the top considerations to watch when setting up and executing payroll in Canada.
Getting started
If you choose to open a branch office in Canada, it’s important to bear in mind that the foreign parent assumes full responsibility for liability, and can make dealings with tax authorities complicated. Instead, it may make more sense to incorporate either at the federal or provincial level, depending on whether you want to trade in multiple Canadian provinces, or just one.
Federal incorporation can be done for C$200 (approximately £120; $145; €140) within one business day, or for C$300 (approximately £185; $220; €205) through an express service that takes just four business hours. Provincial incorporation fees are similar, but vary from province to province.
Companies will need to obtain a Business Number (BN) from the federal government (or a Quebec Enterprise Number [NEQ] for those incorporating in Quebec) for dealing with the Canada Revenue Agency. When a payroll program account is registered with the CRA (which must be done before the first remittance due date), a BN is generated if one hasn’t already been allocated to the business.
The BN can then be used to register to pay their Goods and Services Tax (GST), corporate income tax, and import/export taxes. It may also be necessary to register to collect and remit provincial sales taxes, for Workers’ Compensation Insurance, for provincial Employer Health Tax, and for other provincial and municipal licenses.
Employment considerations
A raft of important legislative changes have been passed by Canada’s federal parliament and have come into force in recent years. These include:
- Labor Code updates: new amendments cover workplace harassment and violence, complaints around unjust dismissals and employment terminations, and equal pay for part-time and temporary employees
- Pay equity: employers with more than ten employees must establish a pay equity plan within three years
- Pay transparency: further requirements around reporting employee salary information
- Diversity requirements: the level of diversity within a company’s directors and senior management must be provided to shareholders.
Employers must review every new employee’s Social Insurance Number (SIN) card within three days of the employee starting work, and have the employee fill out Form TD1 for the personal tax credits return.
Approximately 90 percent of workers in Canada are protected by the unique employment laws of their province or territory, which employers can access here. The other ten percent – which includes many in industries such as broadcasting and banking – are protected by the federal labor standards that define required employment conditions.
The standard for an employee in a federally regulated industry is an eight-hour working day and a 40-hour working week. For non-regulated work, 40 hours is also the standard working week, although this can be higher in some provinces. Overtime rates kick in after the standard working hours for the province in question have been exceeded. In most cases, the overtime rate is at least 150% of the standard salary, but again, this does vary in a number of provinces. Fines for not complying with Canada’s tricky overtime laws can be expensive. A global accounting company once paid an estimated $10 million to settle a class-action suit with its employees, some of whom were regularly forced to work 90 hours per week.
Probation periods vary between 90 days and six months, depending on the province. Notice periods are also variable, but all generally follow the same principle that the amount of notice required increases for employees with more years of service. A minimum of eight weeks’ notice for employees with at least ten years of service is common.
Compensation, Bonuses and Severance
Canadian payroll regulations call for employers to pay employees on a regular basis, whether weekly, bi-weekly, semi-monthly, monthly or annually. As in most countries, every paycheck should clearly account for any wages, overtime, holiday, severance, or bereavement pay. Federal law mandates the observation of nine national public holidays, though each province or territory may observe additional holidays.
There is a federal minimum wage rate, and individual provincial minimum wage rates: whichever is higher takes precedence. The current federal rate is C$15.55 per hour (approx. £9,50; $10.70; €11.40), which is higher than the vast majority of provincial rates at present. However, you should keep a close eye on changes to rates, which can happen on a regular basis.
Bonuses can be paid on a discretionary or contractually defined basis in Canada, and there are no restrictions around their payment. Paying bonuses to reward good performance, or to motivate talented employees, is common. Severance pay varies by province and length of service.
Tax and Social Security
Employers operating in Canada are required to withhold income taxes, at both the federal and provincial level, from their employees and submit them to the appropriate tax collection agencies.
The federal tax rate is progressive based on income, ranging from 15% for the lowest bracket, which is the first C$50,197 of taxable income (approx. £30,500; $37,000; €34,500), to 33% for income over C$221,708 (approx. £135,000; $163,000; €152,000). On top of this, provincial tax rates are applied, also on a progressive basis but with significant variations between provinces: these currently range between 11.5% and 25.75%. A nominal provincial rate of 15.8% applies to non-residents.
For all employees aged 18 to 70, employers in Canada are required to withhold Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums. However, those operating in Quebec contribute to the Quebec Pension Plan (QPP). Those contributions are deducted from wages, salaries, bonuses, commissions and any advances from payroll, among other sources. These rates are normally around 5-6% from each the employer and employee.
There is also a requirement to pay employment insurance (2.21% employer, 1.58% employee); and employers should also pay workers’ compensation contributions of C$1.37 for every C$100 of their payroll.
Holidays and Leave
There are nine days of paid public holiday in Canada each year. On top of this, employees are entitled to around two weeks of paid leave each year in most provinces. Additionally, some provinces allow the paid leave entitlement to be extended to a third week after a certain period of service.
Paid maternity leave entitlement is 15 weeks (18 in Quebec). In addition, paid parental leave can run for up to 35 weeks and can be split between parents as they wish. If a parent’s employer doesn’t cover their earnings at this time, then parents can apply for state benefits to cover a certain proportion of the shortfall.
The entitlement for paid sick leave is a maximum of five days a year, of which the employer should pay the employee for three of them (two in Quebec), as long as they have at least three months’ service. Beyond this, most provinces also have unpaid sick leave structures in place that ensure that employees are able to resume their jobs after an extended time away.
In Summary
As this guide demonstrates, the federal nature of Canada can make it an extremely complicated place to run payroll, as there are so many variations in legal requirements and minimum standards from one province to another. It’s therefore easy to find setting up a Canadian payroll operation daunting, even if you’re an experienced payroll practitioner.
This is where the help of a global payroll provider comes into its own. They can give you all the country and province-specific expertise you need, as well as access to support and solutions that can help you stay on top of all your responsibilities and compliance needs.
This guide is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional. Click here to see more country payroll guides from CloudPay