One of the main challenges global businesses face when expanding or hiring in Canada is navigating the country’s complex federal and provincial payroll tax regulations.
Doing business in Canada gives global companies access to low corporate tax rates and a stable economy. But to ensure success in this market, you must thoroughly understand the local tax regulations to administer compliant and timely payroll to Canadian employees.
Read on for an overview of Canadian payroll tax regulations. Find out how to minimize risk, ensure compliance, and remain on budget as you administer payroll for a distributed workforce across Canada.
Mandatory payroll taxes and contributions in Canada
Mandatory federal payroll taxes and contributions in Canada include the pension fund and employment insurance (EI).
Employers and employees must also pay into provincial and territorial programs, including healthcare and workers’ compensation, and employers must withhold and remit federal and provincial income taxes on employees’ gross earnings.
We outline each of Canada’s mandatory payroll taxes and contributions in detail below.
Provincial healthcare insurance
Canada runs a publicly funded healthcare system for employees across the country.
While provinces and territories receive federal support for their public healthcare funds, each manages its own program, with coverage and contribution rates varying between jurisdictions.
Take British Columbia (B.C.), Manitoba, and Quebec for example: In 2023, employer contribution rates in B.C. range from 1.95% to 2.925% depending on payroll size, whereas in Manitoba they range from 2.15% to 4.3%, and in Quebec, they range from 1.25% to 4.26%.
Employers and employees in Canada must pay into the public retirement fund, which is accessible to employees when they turn 65. The fund you pay into for each employee depends on where in Canada the employee resides.
All employees across Canada, except in Quebec, pay into the Canada Pension Plan (CPP), while employees in Quebec pay into the Quebec Pension Plan (QPP).
The CPP tax rate for employers and employees in 2023 is 5.95% each, capped at CAD$3,754.45 annually for employers and employees. The QPP tax rate is 6.4% each for employers and employees, both capped at CAD$4,038.40 annually.
Employment Insurance (EI) provides income support for individuals who are unemployed but are willing and able to work. It also provides income support for people who are on leave for maternity, parental, illness, or another covered life event.
The table below lists EI contribution rates and annual caps for employers and employees in Canada and Quebec:
|Federal EI rate||Federal EI cap||Quebec EI rate||Quebec EI cap|
As a part of the CPP and QPP, survivor benefits provide financial support to related survivors of the deceased and include three benefits:
- Death benefit. This is a one-time payment to the deceased person’s estate.
- Survivor’s pension. This is a recurring monthly payment to the surviving spouse or common-law partner of the deceased.
- Children’s benefit. This is a recurring monthly payment to the dependent children of the deceased.
Qualifications for each benefit apply. For instance, individuals between 60 and 64 whose spouse or common-law partner has passed away, who have not remarried or found another common-law partner, and whose annual income is less than CAD$28,872 qualify for the survivor’s pension.
A portion of CPP and QPP taxes and contributions comprise payments to survivor insurance.
Workers’ compensation insurance in Canada is an employer-paid benefit that provides medical treatment and income support to employees who can’t work due to a work-related injury or illness.
Each province and territory manages its workers’ compensation program through a Workers’ Compensation Board (WCB), with policy terms and rates varying across jurisdictions.
Employer contribution rates in 2023 range from 0.95% in Manitoba to 2.65% in Nova Scotia. Employers in select industries, such as dentistry and banking, are exempt from providing workers’ compensation insurance to their employees.
Quebec parental insurance
The Quebec Parental Insurance Program (QPIP) funds paid leave for parents of newborn or newly adopted children. QPIP only applies to employees who work in Quebec and employers who engage talent in the province.
The employer contribution rate in 2023 is 0.692%, capped at CAD$629.72 annually, while employees pay 0.494% up to CAD$449.54.
Quebec’s Act Respecting Labour Standards establishes workplace protections for employees in most industries in Quebec, setting out minimum standards for things like wages, holidays, leave, and termination notices. Like the QPIP, the Labour Standards Act only applies to employers and employees in Quebec.
Most employers in Quebec must pay a contribution of 0.03% to 0.06% under this act, which applies to per-employee annual earnings up to CAD$91,000. Employees don’t pay a tax under this act.
Vacation pay accrual
When calculating payroll, employers in Canada must also factor in vacation pay, a portion of wages an employee earns while on vacation.
Vacation pay is calculated as a percentage of the employee’s pay, and that percentage is based on how much vacation an employee is entitled to, which varies by province. Typically, the employer contribution ranges from 4% to 10%.
Employee income taxes
Employers in Canada must deduct and remit income taxes from employee gross monthly earnings on behalf of their employees.
While payroll taxes fund insurance programs like healthcare and provide income substitution for events like maternity and sick leave, income taxes fund more general public services, such as transportation, education, fire services, and road maintenance.
Employees in Canada pay income taxes to federal and provincial or territorial levels of government. However, employers only have to remit taxes from employee earnings once to the federal government, which then repasses provincial and territorial portions accordingly.
The table below outlines Canada’s federal income tax brackets and their rates:
|Up to CAD$53,359||15%|
|CAD$53,360 to CAD$106,717||20.5%|
|CAD$106,718 to CAD$165,430||26%|
|CAD$165,431 to CAD$235,675||29%|
Provincial income tax brackets vary between jurisdictions, ranging from 5.06% to 20.5% in B.C. and 10% to 15% in Alberta in 2023. You can find a full list of provincial and territorial income tax brackets here.
How is payroll tax calculated in Canada?
To calculate payroll taxes and contributions in Canada, first determine your employee’s gross earnings. Next, calculate employer and employee payroll tax liability for EI, pension, workers’ compensation, provincial health insurance, and employee income taxes as specified percentages of the employee’s gross earnings.
Employers that engage talent in Quebec also have to factor in contributions and taxes for QPIP and the Act Respecting Labour Standards.
Use our employee cost calculator to accurately calculate and budget payroll costs for your employees in Canada.
Key elements of payroll in Canada
For global companies that hire employees in Canada or do business in the country, understanding the key elements of local payroll is essential for avoiding fines, litigation, and other noncompliance penalties.
Key aspects of Canadian payroll include but are not limited to the following:
- Payroll cycle. The payroll cycle in Canada is biweekly, meaning employees usually receive 26 paychecks per year.
- Minimum wage. The federal minimum wage in Canada in 2023 is CAD$16.65 per hour in all federally regulated industries, such as air transportation, banking, and radio broadcasting. Employees in other industries are subject to provincial minimum wages, which range from CAD$14.75 to CAD$16.77 in 2023, depending on the province.
- Overtime. Federal legislation considers anything beyond eight hours per day or 40 hours per week as overtime, for which employees are entitled to at least 1.5 times their standard wage or the equivalent of time off with regular pay. Employees in non-federally regulated industries are subject to provincial overtime regulations, which vary.
- Termination. Employers must provide appropriate notice of termination according to the terms provided in the employment agreement while also meeting the minimum requirements set out by the province where they operate.
- Severance. In federally regulated industries, employees who have worked for their employer for at least 12 months are entitled to two days’ pay for each year of service with a minimum of five days’ pay. Employees in other industries may be entitled to severance pay according to provincial labor law, which varies across provinces.
- Annual leave. Employees in federally regulated industries in Canada are entitled to two weeks of paid annual leave after completing one year of continuous service for their employer, three weeks after five years of service, and four weeks after 10 years of service. Employees in other industries are subject to provincial labor regulations, which vary between provinces.
- Parental leave. Canadian residents who are pregnant or caring for a newborn or newly adopted child are entitled to paid parental leave. They can choose from standard leave, which provides 40 weeks at 55% of regular earnings, capped at CAD$650 per week, or extended leave for 69 weeks at 33% of regular earnings, capped at CAD$390 per week.
- Sick leave. Employees in Canada who provide a medical certificate proving they have an illness or injury that prevents them from working are entitled to up to 15 weeks of paid leave at 55% of earnings, capped at CAD$650 per week.
Learn more about employment rights in Canada in our article on Canadian employment law.
How to set up payroll in Canada
While the exact payroll process varies depending on individual circumstances, the following outline gives you a general idea of what payroll procedures in Canada entail:
- Open or update your payroll account. Collect the necessary information for opening a payroll account, such as the date your employees will receive their first wages, your payment cycle, the number of employees, and your payroll service (if any), and register for a payroll account via the Canada Revenue Agency’s (CRA) online services.
- Set up payroll. Collect your employees’ social insurance numbers, determine their province or territory of employment, and collect completed tax forms (e.g., TD1, TD-X, TD-IN) to prepare payroll calculations.
- Calculate, withhold, and remit deductions. Calculate and withhold relevant deductions from employee earnings manually or via the online payroll deductions calculator. Make timely remittances and correct any errors or misallocated payments.
- Pay employees. Pay employees according to your payroll schedule and provide employees with a payslip indicating their net earnings and withholdings.
- File annual payroll returns and distribute tax slips. Complete tax slips for annual reporting obligations (e.g., T4 and T4A), submit annual summaries to the CRA, and distribute relevant tax slips to employees indicating total annual earnings and deductions.
Payroll options for employers in Canada
To administer payroll to a distributed workforce in Canada, global companies generally take one of the following approaches: internal payroll administration, local payroll outsourcing, and global payroll outsourcing.
We outline each of these methods in detail below.
Global companies that have already established entities in Canada may choose to hire local talent and build in-house finance teams to run payroll for their workforce in the country.
However, a big risk with internal payroll is that it leaves the employer fully responsible for compliance. If you choose this route, be sure to source experienced HR staff with thorough knowledge of local employment and payroll regulations, and consider obtaining proper legal counsel to reduce risk exposure.
Local payroll outsourcing
Global companies with entities in Canada may choose to outsource payroll to a local payroll processing firm instead. These firms handle the entire payroll process on your behalf, from calculations and payments to reporting and filing.
While this approach decreases your workload, it also limits your visibility into the payroll process, which can result in payment errors or delays. This option limits your ability to easily scale payroll operations across multiple countries.
Suppose you plan on engaging talent in other countries—if you do, you may end up working with multiple local payroll providers with different processes and software systems, siloing payroll information and decreasing visibility even more.
Global payroll outsourcing
Lastly, global companies with Canadian entities can outsource payroll to a global payroll partner. With expertise in payroll and tax legislation worldwide, including in Canada, a global payroll partner compliantly runs payroll for your international workforce on your behalf.
Typically, a global payroll partner works with a network of local payroll vendors worldwide to streamline payroll processes into a single management platform, simplifying payroll administration and reducing compliance risks when paying a distributed workforce.
How to administer payroll in Canada before entity establishment
To directly hire and pay talent in Canada, global companies must first establish a legal entity in the country. However, a simple workaround is to partner with an employer of record (EOR).
An EOR allows companies to legally engage and pay employees worldwide without establishing local entities or worrying about violating local labor and tax laws.
With expertise in international payroll regulations and tax laws, an EOR can compliantly onboard top talent in your target market and administer timely, accurate payroll to your distributed workforce on your behalf—all while you continue owning day-to-day tasks and responsibilities.
Whether you want to test the waters of a foreign market before making long-term investments or you want to engage local talent while undergoing the lengthy process of entity establishment, an EOR makes it possible.
Plus, an EOR partner not only runs compliant global payroll but also handles HR tasks like immigration, benefits administration, talent relocation, and ongoing support, giving you the option to easily expand operations into multiple markets if you so choose.
Learn more: What Is an Employer of Record (EOR)?
Simplify payroll and taxes in Canada with Velocity Global
If you dream of engaging top Canadian talent, but the complications of entity establishment and local payroll regulations are holding you back, partner with Velocity Global to make it happen.
Velocity Global’s EOR solution enables global businesses to hire and pay talent in over 185 countries, including Canada, without first undergoing entity establishment.
Our solution simplifies running payroll for supported employees in Canada and beyond by consolidating all payroll processes into a single workforce management platform—facilitating timely, accurate, and compliant payroll and reporting for your distributed workforce.
Let us handle the heavy lifting so you can grow your distributed workforce and engage top Canadian talent with ease.
Contact Velocity Global today to get started.
Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information—and your interpretation of it—is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information is hereby expressly disclaimed. All content is provided "as is" and Velocity Global makes no representations or warranties concerning this information.