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How to Hire and Pay Workers in Canada: Guide for US employers

February 20, 2021
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There are a lot of good reasons to hire a Canadian. Canadians share time zones, language, and—for the most part—the same culture as the United States. And they’re polite.

But Canada isn’t just the 51st state. It’s a sovereign nation—so, when you hire a Canadian foreign worker, you’re hiring internationally. That presents complications in terms of tax remittance and differing employment laws.

Luckily, you’ve got a few choices when it comes to tackling these problems.

How can a US company hire and pay workers in Canada?

If you’re going to hire Canadians, you’ve got two options:

  1. Hiring contractors
  2. Hiring employees

Those options narrow depending on the specifics of the work being performed. For instance, not all workers can be legally hired as contractors.

Whichever route you take, you’ll have a choice to make: Whether you manage all the paperwork for hiring a Canadian contractor or employee by hand, or whether you opt for outsourcing your hiring through an employer of record (EOR).

An employer of record (similar to a PEO service in the US) acts as an intermediary between you and your remote worker, so neither of you have to worry about the nitty-gritty of international employment regulations, contracts, and the rest.

Deel does both—plus much more than your standard PEO. Our network of legal experts gives you access to customizable hiring contracts for both independent contractors and full-time employees. And through the Deel dashboard, you can easily manage invoicing, international payments, job tracking, and even employee insurance benefits.

How to hire a Canadian as an independent contractor?

Hiring a Canadian as an independent contractor is the most straightforward way to add them to your team. Typically, a contractor will invoice you for their time or labor, and you pay them; they don’t receive a salary. They operate as their own, independent small businesses, and each files its own tax return.

Tax forms and tax liability for Canadian independent contractors

When you hire a Canadian independent contractor, you do not need to submit a Form 1099-NEC for them. Form 1099-NECs are for American contractors only.

But how do you know your independent contractor isn’t an American living abroad? That’s where Form W-8BEN comes in. By completing Form W-8BEN (or W-8BEN-E if they are acting as an entity) and sending it to you, your contractor reports to the IRS that they are Canadian citizens.

You aren’t required to file this form with the IRS. Just keep Form W-8BEN in your files. In case of an audit, you’ll use it to prove your contractor is Canadian, and that you don’t need to file a Form 1099-NEC for them. This form will also tell the IRS not to charge the contractor income tax, because they’re not a US citizen.

When they work as independent contractors, Canadians withhold their own income taxes and social security benefits to pay the Canadian government.

What makes a Canadian remote worker an independent contractor?

According to the Canada Revenue Agency(CRA), an independent contractor:

  • Does the bulk of their work in their own workspace, and covers expenses related to that workspace
  • Is hired for a specific job or jobs, not on an ongoing basis, eg. full-time
  • Does not receive any protection or benefits from the entity paying them (eg. no benefits packages)
  • Actively advertises their services—there’s proof (on LinkedIn or a personal website) that they’re self-employed and taking on work
  • May hire sub-contractors to complete work for them

Read more about how to become an independent contractor in Canada.

How to hire a Canadian foreign worker as a remote employee?

Hiring a Canadian as a remote employee is more complicated. However, if they meet the legal definition of an employee—that is, if they don’t qualify as an independent contractor, according to the list above—it’s legally necessary to have them on payroll.

You have three options for hiring a Canadian as a remote employee: Hire them directly, set up a Canadian subsidiary, or use an Employer of Record (EOR) service.

Hire Canadian foreign workers directly

According to fintech entrepreneur Daniel Aisen, any US corporation can hire a Canadian to work for them, so long as that individual is not doing business in Canada. (For example, running their own, Canadian business on the side, while working for your US corporation.)

There are a few hoops you’ll have to jump through before putting them on payroll, though.

First, you’ll need to register with the CRA, so you can pay Canadian payroll taxes. Then, you must open an account with a Canadian bank, from which you'll pay all taxes.

It’s now up to you to remit, file, and pay Canadian Pension Plan (CPP), Employment Insurance (EI), and income tax deductions to the CRA.

Finally, you’re required to abide by all Canadian HR regulations.

Before starting down this road, talk to a tax attorney familiar with filing Canadian tax and hiring Canadian employees, to make sure you have all your bases covered.

Open a Canadian subsidiary

If you have the resources, you may wish to open a subsidiary of your corporation in Canada. In that case, the Canadian government would treat your subsidiary as a Canadian company— a resident of Canada —for the purposes of the Income Tax Act, and you’d pay both federal and provincial income tax.

This is a complicated undertaking. If you’re planning to open a Canadian subsidiary, you should talk to your accountant and lawyers. A subsidiary may make it easier to hire large numbers of Canadian remote workers and streamline your yearly tax process somewhat. But you’ll need professional guidance to get it off the ground.

Use employer of record services

When you choose to use employer of record (EOR) services, you are outsourcing the hiring process to a third-party. An employer of record will hire on behalf of you and take care of all the paperwork: employment contract, payroll, benefits, and taxes. Keep in mind that while the employer of record handles all employment issues that may arise, you will still be in charge of your business operations and employees' experience.

Read more about the employer of record services.

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Do Canadian workers need a US work visa?

Unless one of your Canadian employees comes to the US to work in-office for you, there’s no need for them to get a visa. Think of visas as only necessary for work done on US soil.

In case your remote employee does decide to head south, though, they have three types of visa to choose from:

  • The H1-B visa, for those with “specialty occupations.” Engineers, accountants, web designers, and computer analysts qualify for these.
  • The TN1 visa, for those in other occupations. These include graphic designers, medical workers, and scientific professionals. You can find a full list of occupations in the Code of Federal Regulations.
  • The L1 visa, for managers or executives, transferring from a Canadian subsidiary or branch of your business. They must have been working for at least one year before applying and must be transferring to a management job in the US.

Employment laws in Canada by province

There are two levels of Canadian employment law: Federal, and provincial. Each province decides:

  • The minimum age of employment
  • Hours of work per week and overtime pay
  • Minimum wage and equal pay
  • The weekly rest day
  • General holidays with pay
  • Annual vacations with pay
  • Parental leave
  • Individual and group terminations of employment

Canadian Labour Relations provides a directory of employment regulations by province.

Keep in mind that, if you hire multiple Canadian employees, they may each work in different provinces. The employment standards in Ontario and Quebec differ considerably, for instance, and you'll have to be on top of each.

If you’re using Deel to hire Canadian employees, however, you’re in luck. We guarantee compliance with both federal and provincial for all our hiring contracts.