Hire and Pay Workers in Canada

In-Depth Guide for a US Company Hiring Employees in Canada

What does a US company hiring employees in Canada need to know about employment laws, taxes, and payments? Read on to find out.

Owen Yin
Written by Owen Yin
October 1, 2021
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Key takeaways

  1. US employers can hire Canadian employees by engaging them directly, opening a foreign subsidiary, or using a global employer of record (EOR).
  2. Canada’s employment laws differ by province, and US employers need to stay on top of them to ensure compliance.
  3. Some US employers hire Canadian workers as independent contractors instead of employees, which puts them at risk of misclassification.

There are many perks to being a US company hiring employees in Canada. US employers and Canadian workers share similar (if not the same) time zones, languages, and workplace cultures. American employers can also benefit from lower hiring costs, potential tax credits, and an expanded talent pool.

But hiring a Canadian foreign worker presents complications in terms of tax remittance and differing employment laws. Here’s what US employers should know before hiring a remote Canadian employee.

Can a US company hire an employee in Canada?

Yes. If you’re going to hire Canadians, you have two options:

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

If you decide to hire an employee, you’ll have to choose between managing the process and documentation yourself or outsourcing the work to an employer of record (EOR).

In the US and Canada, employer of record services are similar to a professional employer organization (PEO). An EOR acts as an intermediary between you and your remote worker, so neither of you has to worry about the nitty-gritty of international employment regulations or misclassification. Learn more about the difference between an EOR and a PEO

Aa Deel, our network of legal experts gives you access to customizable, labor-law-compliant contracts for both independent contractors and full-time employees. You can easily manage invoicing, international payments, and even employee insurance benefits such as health insurance and unemployment insurance in one dashboard.

How to hire and pay a Canadian foreign worker as a remote, full-time employee

Hiring a Canadian as a remote, full-time employee is complex, but it might be unavoidable if the worker meets the legal definition of an employee.

A US company hiring Canadian employees has three options: Hire them directly, set up a Canadian subsidiary that will act as the employer, or use an EOR.

Hire Canadian foreign workers directly

Before you hire your new Canadian employee and add them to payroll, you have to register with the Canada Revenue Agency (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.

You’ll then be responsible for tracking, filing, and paying 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.

You may want to engage a tax attorney familiar with filing Canadian taxes and hiring Canadian employees before you directly hire your employees.

Open a Canadian subsidiary

If you have the resources, you may wish to open a subsidiary in Canada. For example, Nike has a subsidiary called Nike Canada, which is incorporated in Canada. In this case, the Canadian government treats your subsidiary as a Canadian company for the purposes of the Income Tax Act, and you 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. Opening a subsidiary can make hiring large numbers of Canadian remote workers easier and streamline your yearly tax process. But you’ll need professional guidance to get it off the ground, especially when it comes to navigating global payroll.

Use employer of record services

Using an EOR is usually the most cost-effective and compliant strategy for hiring international employees. When you use EOR services, you outsource the hiring process to a third party. 

An employer of record will engage the US employee working in Canada using their own local subsidiary and legal expertise. The EOR becomes responsible for all the necessary paperwork and regulations, such as the employment contract, payroll, benefits, and taxes.

While the employer of record handles all employment issues that may arise, you remain in charge of business operations and the employees’ experience.

Canadian employment laws by province

Each province has different employment standards that you must comply with. You may have several Canadian employees working in different provinces, which means more regulations and compliance standards to stay on top of.

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 Labor Relations provides a directory of employment regulations by province.

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. They can remain Canadian citizens and don’t need a green card or permanent resident status. Think of visas as only necessary for work done on US soil.

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

  • The H1-B visa, for those with “specialty occupations.” Engineers, accountants, web designers, and computer analysts may qualify for this visa
  • 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 transferred to a management job in the US

Learn more about how Deel can help your team with visa mobility support.

How a US company can hire an independent contactor in Canada

Many independent contractors work for a US company from Canada. Typically, a contractor will invoice you for their time or labor. They operate as their own, independent small businesses, and each contractor files their own tax return. 

What makes a Canadian remote worker an independent contractor?

According to the 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
  • Does not receive any protection or benefits from the entity paying them (for example, healthcare insurance or retirement contributions)
  • 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 workers can become independent contractors in Canada.

Tax forms and tax liability for Canadian independent contractors

Thanks to a tax treaty between the US and Canada, Canadian independent contractors are not subject to US withholding tax when they get paid.

When you hire a Canadian independent contractor, you do not use IRS Form 1099-NEC. 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 confirms they're a Canadian resident and should not be subject to US withholding tax.

You aren’t required to file this form with the IRS, but keep it in your files. In case of an audit, you’ll use it to prove your contractor is Canadian and doesn’t need a Form 1099-NEC.

When Canadians work as independent contractors, they're responsible for their own income taxes and social security benefits, which are paid to the Canadian government. Just like with American contractors, there’s nothing more an employer has to do.

Use Deel to compliantly engage workers around the world

Building an international team can be time-consuming. There are different local labor laws, taxes, and mandatory employee benefits for each country to keep up with. 

When you use Deel to engage Canadian workers, we ensure compliance with all federal and provincial regulations so you can hire employees and contractors with full confidence.

Want to learn how it all works? Book a demo today to find out. 

Disclaimer: This content is for informational purposes only and does not constitute legal or tax advice.

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