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 $1.64 trillion in 2020 was only around eight 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 ninth largest global economy.
The country’s transparent and efficient regulatory framework helps make opening a business within its borders a relatively straightforward process. The country is ranked 23nd 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.
Opening a branch office is one way for a company to set up a business in Canada, but it comes with some drawbacks – one of which being that the foreign parent carries full liability for the branch’s operations. In addition, operating as a foreign office can complicate the company’s dealings with Canadian tax authorities and leave its stakeholders jointly or individually liable for tax debts in multiple countries. From a tax point of view, branches are permanent establishments of non-resident companies and a Canada branch is not a separate legal company from the parent organization.
Organizations that are looking to operate in Canada long-term can incorporate at either the federal or provincial level. Federal incorporation allows a business to trade overseas and in any Canadian province, whereas provincial incorporation allows a business to trade internationally and only in the single province in which it was incorporated. Federal incorporation can be done for $200 (£117, €132) within one business day, or for $300 (£176, €198) 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.
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 10 percent – which includes many in industries such as broadcasting and banking – are protected by the federal labour 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. Employers must also 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.
Since immigration in Canada is an area of shared federal and provincial responsibility, companies’ ability to hire foreign workers depends on the location in which they operate. In all hiring decisions, employers should be mindful of the stipulations of the Canadian Human Rights Act (CHRA), which prohibits discrimination on the basis of gender, race, ethnicity, age and a number of other grounds.
In addition, the Employment Equity Act (EEA), which falls under the Department of Justice Canada, establishes protections for the rights of four “designated groups” in particular: women, Aboriginal people, members of visible minorities, and people with disabilities. Providing accessible workplaces for the last of these groups was further enshrined by the Accessible Canada Act, which came into force in July 2019.
A raft of important legislative changes have been passed by Canada’s federal parliament and are have come into force over the last few 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.
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.
Minimum wages are set at provincial level, can change often and vary significantly between provinces. However, in April 2022, the federal minimum wage was raised to $15.55 per hour, which is higher than the vast majority of provincial minimums - the higher rate always takes precedence. Check here for the latest levels and planned adjustments across all Canadian territories and provinces.
For companies governed by regulations at federal level, overtime is federally enforced at 1.5 times an employee’s regular rate, for all work beyond eight hours in a day or 40 hours in a week. 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.
Companies governed by provincial regulations should be aware that some provinces exempt overtime laws, or apply higher hour limits before overtime can be paid, for certain occupations. These vary across different provinces.
Tax & Withholding considerations
The aforementioned TD1 form is used to determine the amount of tax to be deducted from an individual's employment or other income, such as pension income. It is important to note that if an employee has more than one employer at the same time and has already claimed personal tax credit amounts on another TD1 form, the employee cannot claim them again. Likewise, individuals do not have to complete a new TD1 every year unless there is a change to their federal, provincial personal tax credit amounts. However, if there is a change (e.g. an employee becomes disabled or gets married), employees must complete a new form no later than seven days after the change.
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 percent for the lowest bracket (the first the first $50,197 of taxable income as of 2022), to 33 percent for the highest earners (income over $221,708). On top of this, provincial tax rates are applied, also on a progressive basis but with significant variations between provinces.
Employers that neglect to withhold income taxes from their employees may be subjected to a penalty equaling 10 percent of the taxes not withheld. The period in which taxes are deducted and due (e.g. monthly or weekly, etc), depends on the amount collected.
Taxes are remitted by employers electronically, in person or through mail to their federal and provincial governments. However, employers may be required to remit electronically, depending on their total average monthly withholding amount. Failing to pay, or to pay on time, can be costly. Employers who fail to deduct may be susceptible to a 10 percent penalty on the total undeducted amount of CPP, EI and income tax. Penalties occurring more than once in a calendar year may increase to 20 percent. Additionally, employers who withhold but fail to remit may be charged penalties between three percent and 10 percent, depending on the lateness of payment.
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.
Specific rules are applied to non-Canadian resident employees, where only the income they source in Canada is subject to Canadian income tax. Additionally, non-residents who reside in one of the many countries that has a tax treaty with Canada may be eligible for reduced tax rates or tax exemptions. If the individual does not need to pay any Canadian income tax, they are not required to file a tax return.
A non-resident corporation, however, is required to file a Canadian tax return annually, even if its income is exempt from Canadian tax. The corporation may also be required to collect and remit Goods and Services Tax (GST) and Harmonized Sales Tax (HST), even if it does not have a permanent establishment in Canada.
All non-residents are taxed on capital gains from disposing of what is described as ‘taxable Canadian property’. This includes real estate, resources, use of taxpayer-owned property, and shares, options and interests in public or privately-owned corporations.
Employment insurance & leave
For global payroll teams, one of the main federal acts affecting Canada is the Employment Insurance Act. Employment insurance essentially funds maternity and paternity leave, as well as sickness and compassionate care. Both employers and employees contribute to this fund; employers pay in at 1.4 times the rate of employees. Such leave can range from a few days to as much as 71 weeks, although there can be a significant reduction in income.
For example, employees in most provinces who are expecting a child are entitled to 40 weeks of benefits, which can be used for one parent or be split between couples (maximum 35 weeks for any one parent). This is paid at 55% of their normal income, up to a maximum of $638 per week. Alternatively, they can choose the extended parental benefit which runs for up to 69 weeks (maximum 61 weeks for any one parent) and pays 33% of normal income, up to a maximum of $383 per week.
In certain situations, biological mothers are entitled to as many as 71 weeks paid leave when combined with sick leave and compassionate care leave. This excludes Quebec, however; this province has its own program that offers maternity, paternity and parental benefits. Hence, the federal Government of Canada adjusts premiums accordingly for that province.
With the exception of certain industries that are governed at the federal level, paid leave is also mandated at the provincial level and varies in each region. However, on average, employees receive two weeks of paid vacation per year, and receive entitlement to a third week after six years of service.
Employers are responsible for adhering to federal and provincial record keeping requirements pertaining to compensation as well as taxes, insurance premiums and social contributions. Furthermore, records must be verifiable upon the request of certain regulating bodies such as the Canada Revenue Agency (CRA).
At federal level, records are required to be retained for a minimum of six years from the last tax year in which they relate to an employee. Requirements at provincial level vary, ranging from one to five years. However, records concerning long-term acquisitions and disposal of property, or information that would affect the sale or liquidation of a business, must be retained indefinitely.
Records must be retained at the place of business or residence of the relevant corporation or employee, unless the CRA gives written permission otherwise. However, if records are kept outside Canada and are only accessed from Canada electronically, as may be the case for an international business, these record-keeping rules do not apply.
Organizations that establish operations in Canada have rigorous payroll practices in place to ensure record keeping needs are met. Understanding these rules is somewhat difficult, and keeping up with them is very time-consuming, but doing so is essential. Practitioners who fail to comply with record-keeping requirements expose their companies to a host of fines. For example, employers who fail to deduct withholding taxes may be liable to a 10 percent penalty on the total amount of the Employment Insurance taxes not withheld.
The requirements around payroll for businesses operating in Canada are complex, particularly in the variations between different provinces and the federal government. But this should not deter any enterprises from exploiting the opportunities available in one of the world’s largest and most stable economies.
Knowing that Canada takes its payroll compliance guidelines and business regulations seriously makes the value of a trusted global payroll solution all the more important for multinational companies. That’s why it's worth considering deploying an end-to-end cloud solution, supported by the services of a partner with deep expertise in Canada payroll, to seamlessly navigate a path through the complexity.