Legalities of Hiring Remote Canadian Workers for US Based Companies

Legalities of Hiring Remote Canadian Workers for US Based Companies

Many American companies look north to hire Canadian workers to work remotely for their operations. It could be salespeople selling their products or services in Canada, technicians to service their Canadian installations, or simply Canadian talent to support their business inside the US or internationally. In such cases, a US work visa is not required as the Canadian worker is not relocating to the US, but rather working remotely in Canada – typically out of their home or in a shared executive suite.

But you’re probably wondering “How exactly do we go about hiring a worker in Canada when we don’t have a legal presence there?” The good news is that you can, and this article will explain how.

Option 1: Hire the Canadian Worker as an Independent Contractor

One simple solution is to hire the Canadian as an independent contractor and maintain a business to business relationship. However, this solution is fraught with potential problems. As the Canadian worker is not your employee, you don’t have the same level of employer protection when it comes to intellectual property, non-disclosure, and non-solicitation. Independent contractors are also legally allowed to set their own hours and schedules, take on additional clients that could be your competitors, and even hire substitute workers to perform work on their behalf!

Without a legal presence in Canada, you can’t genuinely reciprocate the type of employer-employee relationship that most workers seek in return for their loyalty and commitment. To make matters worse, there is also an income tax liability that your Canadian worker bears for being an independent contractor, which may make them queasy or unwilling to work for you in such an arrangement.

The Canada Revenue Agency (CRA) is Canada’s equivalent of the IRS and they don’t like seeing Canadian workers misclassified as independent contractors when they behave as employees. Although CRA normally penalizes the employer for worker misclassification, when the employer is outside of the country, it is the Canadian worker who must deal with the consequences. In that case, the Canadian worker is deemed a “Personal Service Business,” or PSB.

All of a sudden, your Canadian worker is not allowed to write off any business expenses, all their revenues become taxable, and they are forced to back-pay employer payroll taxes (often with penalties) that you, as their real employer, would have been obligated to pay had you been located in Canada. Your once happy and loyal Canadian worker may suddenly become the thing of the past, finding it too complicated and costly to continue your working relationship.

Option 2: Hire the Canadian Worker through a Professional Employer Organization (PEO) based in Canada

Professional Employer Organizations (PEOs) are essentially intermediary employment agencies that act as your official co-employer partner in Canada. The PEO agency becomes the Employer of Record (EOR) for your Canadian worker, and they place back the worker to you as their foreign client. This gives you full control over the daily activities of the worker, while the PEO processes their payroll on your behalf.

As the employer of record for your Canadian worker, your PEO partner would look after all the following:

  • Canadian employer payroll tax remittances
  • Employee source deductions
  • Worker’s compensation insurance
  • Social security contributions (Known as CPP in Canada)
  • Unemployment insurance contributions (Known As EI in Canada)
  • And even issuing your Canadian worker a W-2 (Known as a T4 in Canada) at the end of the year so they can file their income taxes properly. 

For you as the US employer, such an arrangement also provides added security knowing that your company is compliant with Canadian tax and labour laws.

Most PEOs in Canada are also registered employment agencies, as Canadian labour and tax laws have specific regulations allowing employment agencies to hire workers as their agency employees, but placed under the direction and control of their clients. Such specific employment agency laws help protect placement worker rights and keep our clients in compliance with laws.

1 Comment

  • October 18, 2019

    Webcam Startup

    How do you go about reporting to the IRS though?

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