With mirrored time zones, close proximity, shared language, and similar talent pools and business practices, Canada can be a natural extension for a US company’s workforce. And hiring employees in the country means you’ll need to learn how to do payroll in Canada. While it’s an easier process than in some other countries, you’ll still need to register your business, set up a local bank account, get accurate employee information, and ensure compliance with Canadian employment laws.
A note about currency: Canada’s currency is the Canadian Dollar. For comparison purposes, we’ll note the equivalent US Dollar (USD) figure, where applicable, using the conversion amount relevant at the time of writing this article. The conversion rate used is 1 Canadian Dollar = 0.74 USD. Make sure you check current conversion rates to ensure accurate calculations.
Use these seven steps as a guide on how to do payroll for Canadian workers.
Step 1: Set Up Your Business as an Employer
If you want to hire an employee and run payroll in Canada, you’ll first need to set up your business as an employer. Having an entity in Canada allows you to hire and pay employees directly and sets you up for greater and easier expansion later. If you plan to have a large Canadian workforce, this is probably your best option, albeit a complex one. If you’re only looking to hire a few Canadian employees, you might be better off working with an employer of record (EOR) to hire and pay the workers for you.
We recommend Remote because it not only manages international recruitment and payroll for you but also provides solid compliance and HR support. It even has robust intellectual property protection tools and competitive benefits packages you can offer to employees.
If you choose to register your business and pay employees directly in Canada, you first need to get a business number from the Canada Revenue Agency (CRA). You can do this process completely online. You can also request a business number over the phone or by regular mail. This number is like an employer identification number in the US. You’ll use this number to remit required deductions like income taxes, employment insurance, and the Canada Pension Plan (CPP).
In Step 2, you’ll need to establish payroll processes. However, there is one part that you’ll need to figure out before you register your business—and that’s your pay schedule. The CRA requires this information when you register your business. Take note that Canada does not allow monthly payroll for employees—you can only choose to pay weekly, every other week, or twice per month. Besides that, you’ll also need to know how many employees you have at the time of application and what payroll software you intend to use.
Once approved, you’ll also need to set up CRA accounts for your business taxes, Goods and Services Tax and the Harmonized Sales Tax (GST/HST), payroll accounts, and savings and pension plans. You’ll also need to register with each province where you have employees as the Canadian health system is funded by provincial taxes.
Importance of Classifying Correctly: Employee vs Independent Contractor
The CRA is like the Internal Revenue Service (IRS) in the US. Its job is to collect taxes from businesses and employees—and like the IRS, the CRA takes worker misclassification seriously.
When a worker is an employee, the business withholds all relevant taxes and pays the appropriate government entities. If your worker is an independent contractor, it’s their job to pay the appropriate taxes. If you’re trying to get around registering your business in Canada by partnering with an independent contractor, you risk putting your business and the worker at risk of running afoul of misclassification laws—which could lead to fines and penalties for both of you.
You can partner with a Canadian independent contractor; you just need to make sure they’re actually a contractor and not an employee. To easily distinguish between what makes a contractor vs an employee—typically, a contractor retains control over their schedule and how they work. Meanwhile, if you’re telling someone when to work and how to do their job, they’re an employee.
Step 2: Establish Your Payroll Process & Policies
You’ll want to create a structured process to follow so that you don’t miss any vital payroll steps. Consider the following:
- Pay schedule: How frequently will you pay employees? You cannot pay monthly. Your only options are weekly, every other week, or twice per month.
- Type of employees: Full time vs part time?
- Tracking time: How will you track employee hours, and how will it be reported to you?
- Benefits: What benefits will you offer? Who pays for them? How will you manage the payroll deductions?
- Taxes: How often will you need to pay taxes? What tax rates will you pay? How often do you need to remit taxes and to what agencies?
- Payroll processing and calculations: Will you calculate payroll by hand, Excel, or use a payroll service or software?
- Paychecks: Will you write manual checks, use pay cards, pay via direct deposit, or pay in cash?
To ensure your company processes payroll in Canada effectively, you should also have policies on:
- Leaves: What leaves are required to be paid vs unpaid, and at what rates?
- Overtime: At what rate do you need to pay employees overtime and for how many hours?
- Absences: How do you track absences and know whether they’re paid or unpaid, excused or unexcused?
- Holidays: What holidays are paid and at what rate?
Use our overtime calculator for free:
Step 3: Determine Salaries & Ensure Compliance
The cost of living in Canada is slightly lower than in the US—currently 13% less expensive. The average annual salary in Canada is about $40,572 ($54,500 in USD). When determining what you’re going to pay your Canadian workers, consider their experience and skills, in addition to the cost of living. You may be able to save money by having Canadian workers, but you’ll still need to pay competitive rates to ensure you attract and retain the best talent.
Payroll & Employment Law Compliance
Canada has similar employment and payroll compliance laws to the US, but some go further in providing additional benefits to employees. It’s vital that you understand these differences so you remain compliant. Written contracts are not required though companies frequently use them. Be aware that both English and French are used; in Quebec, French is the majority language.
Canada has a federal minimum wage, currently $15.55 per hour, but it only applies to workers in federally regulated industries. There are many: here’s a full list. For all other workers, each province has its own minimum wage.
Province | Minimum Wage |
|---|---|
Alberta | $15.00 |
British Columbia | $15.65 |
Manitoba | $13.50 (increasing to $14.15 in April 2023 and to $15.00 in October 2023) |
New Brunswick | $13.75 |
Newfoundland and Labrador | $13.70 |
Northwest Territories | $15.20 |
Nova Scotia | $13.60 (increasing to $15.00 in April 2024) |
Nunavut | $16.00 |
Ontario | $15.50 |
Prince Edward Island | $13.70 |
Quebec | $14.25 |
Saskatchewan | $13.00 (increasing to $15.00 in October 2024) |
Yukon Territory | $15.70 |
Be aware that Canada is aggressively increasing provincial minimum wages and will probably not stop at $15. Some provinces are already beyond that amount and have legislation to continue increasing at least once, sometimes twice, per year. So make sure you’re paying attention to the minimum wage in the provinces where you have Canadian employees.
The typical Canadian workweek is 8 or 8:30 a.m. to 5 p.m., for a standard workweek of 37.5 to 40 hours. Employees can work up to 48 hours in a single workweek; however, any hours worked over 40 in a week or eight in a single day are considered overtime and must be paid at 1.5 times the employee’s regular hourly rate. Some provinces have different rules, so review the chart below.
If a workweek includes a holiday, the working hours must be reduced by eight hours for each holiday in that week, which means that a workweek with one holiday would be capped at 32 hours and any time worked beyond that is overtime. Canada has similar exemptions to overtime as the US and each province has its own overtime rules. Note that Canadian employees have the right to refuse overtime work to carry out family responsibilities related to the health or care of any family member or the education of any family member under age 18.
Province | Overtime Hours Begin After | Overtime Pay Rate (multiplied by the regular rate of pay unless otherwise noted) |
|---|---|---|
8 hours in a day 44 hours in a week | 1.5 times | |
8 hours in a day 40 hours in a week | 1.5 times for the first four hours of overtime in a single day, then 2 times for each hour beyond 12 in a single day | |
8 hours in a day 40 hours in a week | 1.5 times | |
44 hours in a week | 1.5 times the current minimum wage except employees who make more than the overtime rate as base pay | |
40 hours in a week | 1.5 times the current minimum wage | |
8 hours in a day 40 hours in a week | 1.5 times | |
48 hours in a week | 1.5 times | |
8 hours in a day 40 hours in a week | 1.5 times | |
44 hours in a week | 1.5 times | |
48 hours in a week | 1.5 times | |
40 hours in a week | 1.5 times | |
8 hours in a day 40 hours in a week | 1.5 times | |
8 hours in a day 40 hours in a week | 1.5 times |
There is no federal requirement to offer paid time off (PTO) to your employees, unless your business operates in a federally regulated industry. If your company qualifies as a federally regulated industry, you’ll need to offer PTO. Be aware that PTO in Canada is not calculated at the rate of pay when the employee takes the time off. Instead, it’s calculated as a percentage of the gross wages an employee earned during the previous year.
- At least two weeks of PTO each calendar year after an employee has worked 12 consecutive months, paid at 4% of earnings
- At least three weeks of PTO each calendar year after an employee has worked five consecutive years, paid at 6% of earnings
- At least four weeks of PTO each calendar year after an employee has worked 10 consecutive years, paid at 8% of earnings
Employers may offer unlimited PTO, but you must ensure that employees actually take off the minimum amounts listed above. Also, note that it’s typical to pay an employee for their PTO before they take the time off—in some places, it’s even required. For example, in British Columbia, an employer must pay the employee’s vacation wages at least seven days before the beginning of the employee’s time off.
Federally regulated employees, such as those in industries like air transportation, banks, and telecommunications, are entitled to 10 paid general holidays each year. If a general holiday falls on a non-working day, employees are entitled to a holiday with pay on the working day immediately before or after the holiday.
- New Year’s Day
- Good Friday
- Victoria Day (the last Monday before May 25 in May)
- Canada Day (July 1)
- Labour Day (First Monday in September)
- National Day for Truth and Reconciliation (September 30)
- Thanksgiving Day (Second Monday in October)
- Remembrance Day (November 11)
- Christmas Day (December 25)
- Boxing Day (December 26)
Canada requires employers to give medical leave for employees of up to 10 days with pay per year. This is an update to the Canada Labour Code which took effect in December 2022. Under this revision, employees earn three days of paid medical leave after 30 days of consecutive employment. Then employees earn one additional day at the start of each subsequent month until they’ve reached a total of 10 days. Unused days may carry over from year to year, but only a maximum of 10 days may be used each year.
Canada does not require employers to pay employees on maternity leave. However, pregnant employees are entitled to take up to 17 weeks of unpaid job-protected maternity leave that can start up to 13 weeks before the expected date of birth. Natural and adoptive parents are also entitled to up to 63 weeks of unpaid parental leave which can be taken by one parent or split in any way between them after the birth of the baby.
Paternity leave is available to fathers for up to one year in addition to the time above, but it is fully unpaid and capped at 78 weeks per parent. It’s only paid if the company has a written policy that fathers may take paid leave or if paid leave is stipulated in their employment contract. Fathers may be entitled to partial pay through Canada’s social security system.
Canada allows for leaves related to critical illnesses. Any employee with a family member who’s critically ill may take up to 37 weeks of unpaid leave or 17 weeks, depending on the family member.
Canada also allows for compassionate care leave. This is unpaid leave allowing employees to take up to 28 weeks off to care for an immediate family member with a serious health condition.
Under Canadian law, an employer must either provide an employee with at least two weeks’ written notice of termination or pay the employee two additional weeks of pay. At-will employment does not exist in Canada like in the US but, unlike other countries that don’t adhere to at-will employment standards, Canadian employers may terminate employees without cause.
However, if an employee has worked for a company for at least 12 consecutive months, they’re also entitled to severance if they were terminated without cause. Severance pay is calculated as two days’ pay for each full year of employment, with a minimum of five days’ pay. Severance is not required when an employee is terminated for cause, when an employee quits, when there is a layoff, or when the employment relationship ends on the date noted in any employment agreement.
Step 4: Collect Employee Data & Forms
As with US-based employees, you’ll need to collect certain data from your Canadian employees. This often includes:
- Employee’s full name
- Employee’s permanent address in Canada
- Documentation proving the employee’s identity
- Employee’s social insurance number
- TD1 form
- Bank account information
- Provincial forms
Step 5: Collect Time Sheets & Calculate Payroll
When a business first launches, they often use paper time sheets. We don’t recommend this, as it’s ripe for errors and misuse. The best and most effective way to keep track of employee hours is to use time tracking software. Your employees clock in and out electronically, and your managers can review and approve time sheets before they get to your payroll team for processing.
Once payroll gets the time sheets, they should still review them for accuracy. A second set of eyes to spot any glaring errors is crucial to ensuring your company runs payroll correctly each time. It’s easier to fix these errors before running payroll, and it creates a smoother process for everyone involved.
When calculating your Canadian payroll, you’ll need to account for tax and payroll deductions. Missing these will leave you out of compliance and could cause costly fines and penalties from Canadian government agencies.
Type of Payroll Deduction | Employer Share | Employee Share |
|---|---|---|
Canada Pension Plan | 5.7% | 5.7% |
Employment Insurance | 1.58% (increasing to 1.63% in 2023) | 0% |
Quebec Pension Plan | 10.8% | 5.4% |
Employer Health Tax | Varies by province | 0% |
Workers’ Compensation | $2.65 per $100 of payroll | 0% |
Besides these payroll withholdings, you’ll also need to withhold appropriate income tax from your employee’s paychecks. Here are the current tax brackets in Canada.
Annual Salary | Income Tax Withholding |
|---|---|
Up to $50,197 | 15% |
$50,198 to $100,392 | 20.5% |
$100,393 to $155,625 | 26% |
$155,626 to $221,708 | 29% |
Over $221,708 | 33% |
For reference, the top tax bracket here is equal to about $164,000 USD. It’s also important to note that Canadian taxpayers are frequently taxed at the provincial level as well.
Be sure to keep track of where your employee works. With over 5,000 miles of shared border, it’s possible that your Canadian employee will come to the US and do work. Depending on where the employee does work inside the US, they may be subject to tax withholdings in that state. If you’re bringing the employee into the US to work, even for a day, they may also need a visa.
Step 6: Pay Employees
Now that you’ve reached the point of calculating your payroll, it’s time to pay your employees. Make sure you’re following the pay schedule you’ve previously outlined.
If you have just a single or handful of employees in Canada, you may want to outsource your payroll to a local provider. They will be licensed and familiar with Canadian payroll laws and processes. While you’ll pay them a fee, it’ll likely be worth your time for just a few workers.
However, if you have more employees or plan on dramatically expanding your Canadian workforce, you may want to hire an international payroll and HR expert to handle payroll in-house, depending on cost differences. If you opt not to outsource, make sure you or your payroll team are familiar with Canadian payroll laws and deductions to ensure you’re making the right deductions from employees’ paychecks and sending tax payments to the right Canadian government authorities.
For the easiest time, you can also work with an international payroll service. Such services are typically familiar with local laws and will ensure that your business won’t miss any compliance regulations.
Step 7: Document & Store Your Payroll Records
Payroll records in Canada must be kept for up to 10 years. Your payroll records should include, at a minimum:
- The dates of employment and rate of pay
- The frequency of pay
- Deductions
- Total regular and overtime pay
- Net employee pay
Bottom Line
Doing payroll in Canada for the first time is not as hard as other foreign countries. With similar processes to the US, you’ll find it won’t take long to get the hang of it. Just make sure you take your time and set everything up correctly from the start.
