How to run a payroll process in Canada
If employing any kind of worker in Canada is on your radar, you won’t want to miss this one
Rivka Abramson| Aug 28, 2023
- Canada's Tech Talent Strategy is luring global talent, prompting businesses to adapt.
- More and more companies are finding that understanding Canada’s complex tax system, both federally and provincially, to be crucial.
- Non-resident workers in Canada face specific tax categories and potential treaties.
- Canadian payroll methods vary; options include EOR, in-house, or non-residential payroll. Get to know them below.
Just a couple of months ago, Canada revealed the launch of its first-ever Tech Talent Strategy, designed to bring more global talent into the country.
For companies aiming to grow their global workforce, this means showtime.
As more tech talent flocks to Canada, businesses will need to learn how to appeal to them. But more importantly, they’ll need to know how to pay them.
And that means building extensive knowledge in Canadian payroll requirements, regulations and customs. It also means knowing how payroll differs in each of Canada’s 10 provinces.
In this post, we dive into just these topics, including:
- Canada’s tax system
- Income taxes for foreigners
- Calculating payroll taxes in Canada
- Differentiating between regional tax rates
Understanding the Canadian Tax System (Are taxes higher in Canada than in the US?)
There’s often a misconception that the US has higher tax rates than Canada. But that’s actually largely untrue. Canada ranks 25th for highest taxes in the world—28 places higher than the US. The top 20% of the highest income earners in Canada pay 60% of total personal income taxes.
In terms of Canada’s overall tax system, employers and employees alike need to be thinking both about the federal level and the territorial or provincial level. For example, in Nunavut the tax rate will range between 4% to 11.5%, while in Newfoundland and Labrador the range will be between 8.7% to 21.8%.
When comparing Canada’s tax system to other countries’, you may want to take into account “The Organization for Economic Co-operation and Development” (OECD) which consist of multiple countries that aim to establish better policies for sustainable economy and wellbeing. Canada, which is a member of this organization, has a corporate tax rate of 26.75% — above average for OECD countries. Meanwhile, 36.6% of Canada’s raised revenue comes from individual taxes, while 11.2% come from corporate taxes.
Income Tax in Canada for Foreigners
Non-resident workers are required to pay taxes on their income. In this case, there are two categories — Part I taxes and Part XIII taxes. Part I taxes apply to payments made to non-residential employees. These are generally taken care of through tax withholdings.
The second category is for other forms of income the non-residential worker may be getting – like rental payments and dividends.
For the most part, non-residential employees are taxed according to the latest federal tax rates, as well as a 48% surtax. If the business itself is established in Canada, then non-residential workers pay provincial or territorial tax, instead. They may also have to pay an additional 25% tax on income sources like dividends.
Another consideration is Canada’s tax treaties with other countries, which could influence how much a company should withhold from an employee’s paycheck.
How to calculate payroll tax in Canada
Canada’s Payroll tax calculation will depend heavily on where in the country the employee is based, their residential status, and their own nationality. The latter is important when considering treaties.
With that being said, below is a basic explanation of what the overall process will look like:
- Gross salary calculation: calculating the employee’s total earnings before taxes.
- Canada pension plan (CPP) contribution: 5.7% of the employee’s gross salary will generally go to the national pension plan – unless the employee’s earnings are at or above the national maximum for pensionable earnings, in which case the contribution will be $3,499.80. Both the employer and the employee pay the same percentage of the employee’s gross salary.
- Employment insurance (EI) contribution for employee: this amount is determined by multiplying the employee’s gross salary by 1.62%.
- EI contributions for employer: employers’ EI contribution is 2.68% of the employee’s gross salary.
- Total payroll tax calculation: the sum of the tax contributions from both employer and employee.
An example to illustrate
With a gross salary of $1,000, the employee’s CPP and EI contributions would be $57 and $16.20 respectively. The employer’s CPP and EI contributions would be the same amounts, as well as an additional $22.68, leading to a total payroll tax of $152.88.
Regional Tax Rates
Canada has 10 provinces, each of these with its own tax laws. It’s important to be acquainted with these differences when hiring in the country.
Toronto (Ontario) Tax Rate
Toronto is Canada’s most populous city and the capital of Ontario. As such, it’s subject to Ontario’s tax rates and laws. Today’s employees’ income tax rates range from 5.05% to 13.16%.
In addition to contrbuting to the federal healthcare plan, Ontario-based workers need to pay the Ontario Health Premium – depending on how much they earn.
Quebec Tax Rates
Quebec is Canada’s second-largest province by population. It’s also the province in the country with the highest income tax rate – ranging from 15% to 25.75%.
Among contributions unique to Quebec, there’s the Quebec Parental Insurance Plan, which offers payments and benefits to people going on maternity or paternity leave.
Tax Calculation in British Columbia (BC)
British Columbia is the province home to Vancouver, an extremely popular city to work in. BC’s tax rate ranges between 5.06% and 20.5%. As for contributions specific to the region, there’s Workers Compensation contribution, made to WorkSafeBC, an organization in charge of workplace safety and compensating workers who get injured because of work-related incidents. How much an employer is expected to contribute will depend a lot on the industry the company’s in and the products and the products it offers — as well as the employee’s role in the business.
Hiring in Canada
When hiring in Canada you have a few routes you can take, depending on the size of your company, your budget, and your growth strategy.
Hiring Canadian Employees via EOR
Partnering with an EOR means outsourcing payroll to an organization that has expertise in the payroll and tax requirements for the regions you’re hiring in. The EOR takes full liability for these processes so that you can focus more on your company’s strategy rather than diving into tax complexities.
Hiring Canadian Independent Contractors
You may also choose to forego the whole employee route and opt for independent contractors, which means not worrying about matters like mandatory contributions or benefits.
This option can be especially appealing if you’re looking for short-term solutions.
If you do choose to work with independent contractors, it’s important to stay in the know regarding best hiring practices as well as regulatory requirements regarding contractors.
Canadian Payroll Processing
Another option for hiring in Canada is establishing a local entity and running your payroll in-house. This process can be a lengthy one and requires in-depth understanding of the payroll requirements and customs in the area you’re aiming to hiring in.
This option is more relevant for companies looking to establish a more permanent presence in the specific region.
Hiring Canadian employees through non-residential payroll
Sometimes, a fourth option can be to set up a non-residential payroll. This is relevant if the country your business is based in has a tax treaty with the country you’re aiming to hire in.
Canadian payroll schedules
Generally speaking, there are four common payroll schedules in Canada. Of course, before choosing any of these, it’s important to be in the know regarding specific provinces’ requirements regarding payroll payment deadlines and frequency.
Canadian Payroll with Papaya
When it comes to navigating Canadian payroll accurately, you have to ensure you’re taking into account ALL the relevant factors. That’s exactly what Papaya does. Our operating system and our partnerships with established accounting and payroll firms in over 160 countries across multiple provinces ensure we’re in the know regarding any country-specific or region-specific requirements. Schedule a demo with our experts today.
How can a U.S. company hire a Canadian?
To hire a Canadian employee, US companies can either do so directly or by working with a third-party provider, like an EOR, to handle the payroll side of things. This is of course if the Canadian employee is based in Canada. If the employee is moving to the US, it’s important to ensure the relevant work visas or permits are obtained.
What is the procedure to pay a contractor in Canada?
Paying contractors in Canada involves ensuring a clear contract is set and signed between the two parties. In terms of how payments can be made to contractors – common methods include wire transfers and payment platforms.
When are taxes due in Canada?
Taxes are generally due on April 30th of the following year