In the past year and a half, remote work has gone from work perk to a working norm. Companies that went remote in response to the pandemic have opted to stay remote or offer it as a hybrid option for some or all their workforce. Going remote offers many obvious advantages to employers, but one of the most important is accessing a wider talent pool. More and more U.S. employers are looking north to Canada to expand their teams or for their hardest to fill roles.
Remote Canadian talent is a great option for US employers but setting up a remote work arrangement in another country can be daunting, especially when it comes to payroll. Understanding Canadian taxes, particularly Canadian payroll taxes which vary from province to province, isn’t easy. Errors in payroll taxes and failure to comply with Canadian employment standards can result in back taxes, fines, and even trigger an audit. That’s why so many U.S. companies work with a Canadian PEO that can take payroll and employment compliance off their hands.
Understanding Canadian Payroll
Payroll requirements in Canada are complex. They include federal and provincial/territorial income tax, CPP, and EI. Employees and employers both pay payroll tax, and both make contributions to CPP and EI. While Worker’s Compensation isn’t a tax, it is often lumped in as part of Canadian payroll taxes for employers. It may seem that each of these has an obvious American counterpart, but rates and rules differ.
1. Payroll Requirements in Canada
To start a payroll in Canada you need to:
- Register your business with the CRA and get a payroll account
- Register to pay provincial/territorial tax in every region you operate
- Register for CPP, EI, and Worker’s Compensation
- Open a Canadian business bank account
- Choose payroll software that complies with CRA rules and employment law
New employees should complete TD1 tax forms no later than 7 days after their start date. There are two TD1 forms, one federal and one provincial, and they assist employers to accurately calculate employee taxes. Employers must provide T4 tax forms by the end of February, summarizing employee earnings and deductions for the year.
While you can choose any payroll schedule you like, biweekly is the most common schedule in Canada, followed by weekly. Remittances to the CRA are due on the 15th of the month and detailed payroll records should be kept for six years, within Canada. Payroll best practices in Canada include setting up digital paystubs and direct deposit into employee bank accounts.
In contrast, U.S. payroll records only need to be kept for three years, save for California, Washington and New York, where records should be kept for six years.
2. Canadian Payroll Deductions
In addition to federal income tax, all Canadian provinces and territories have income tax. In contrast, nine U.S. states, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, lack a state income tax.
While U.S. employers are familiar with deducting UI, Medicare, and Social Security contributions from employees, as well as making matching contributions, Canada’s system is more complicated. Canadian healthcare is funded by general provincial taxes, transfers from the federal government, and in some provinces a special Employer Health Tax only paid by employers.
While all Canadian residents and employers contribute to EI, in Quebec, this contribution is split between EI and the Quebec Parental Insurance Program (QPIP). Similarly, Quebecers contribute to QPP not CPP.
3. Canadian Taxes vs American Taxes
|US Payroll Taxes||Employer Pays||Employee Pays||Canadian Payroll Taxes||Employer Pays||Employee Pays|
|Federal Payroll Tax||✓||✓||Federal Payroll Tax||✓||✓|
|State Payroll Tax||Varies||Varies||Provincial or Territorial Payroll Tax||✓||✓|
|Unemployment Insurance||✓||✓||Employment Insurance (and QPIP in Quebec)||✓||✓|
|Medicare||✓||✓||Employer Health Tax (Manitoba, BC, Ontario, Quebec)||✓|
|Social Security||✓||✓||Canada Pension Plan (or Quebec Pension Plan)||✓||✓|
|Worker’s Compensation||✓||Worker’s Compensation (Provincial)||✓|
4. How Much Is Payroll Tax in Canada?
Because Canada’s tax payroll laws are complex, the amount of tax per paycheck in Canada varies. Canadian employees are taxed on wages, bonuses, and certain employer provided benefits, including life insurance, home office and travel allowances, and all reimbursed expenses submitted without receipts. Each payroll tax has its own cap, so employees can expect to see their tax per paycheck in Canada change over the course of the year.
Provincial payroll taxes in Canada vary. In 2023, the provincial and territorial rates range from 4% for the lowest tax bracket in Nunavut, to 10.8% for the lowest tax bracket in Manitoba. Brackets themselves vary, with each province having their own tax structure. Where British Columbia has seven tax brackets, Alberta has only three. There are five federal tax brackets and rates.
5. Penalties for Payroll and Tax Non-Compliance
There are many rules and regulations surrounding Canadian payroll and Canadian payroll taxes. Employers that fail to make payroll deductions will be fined 10% of taxes owed, and 20% in cases of knowing failure, gross negligence, or repeated failure to withhold taxes. Employers who fail to pay taxes will pay anywhere from 3-20% of taxes owing, depending on how late you are and if you’ve failed to pay in the past.
Risks around end of employment are also high. Individual provinces set rules for minimum wage, vacation time and pay, severance pay, and many other aspects of payroll. Employers need to have a good working knowledge of employment standards across the country. Canadian courts tend to favour employers during labour disputes and no province or territory allows for “employment at will.”
Payroll Services from a Canadian PEO
For US employers, setting up a Canadian payroll can be daunting. The rules governing how payroll works in Canada are complex and vary from province to province. Canada’s payroll laws also come with steep penalties for non-compliance and errors.
Working with a PEO can help expedite the process and make it easier for everyone involved. This allows U.S. companies to spend less time stressing over how to do payroll in Canada and spend more time on their business.
Ready to learn more about how working with Canadian Payroll Services makes remote work and taxes easier? Contact us today!