With the boom of remote work, companies have increased their candidate base to stretch well beyond the boundaries of cities, states, and even countries—and many employers are looking to tap into Canada’s deep talent pool of qualified candidates.
- Non-Canadian employers that directly hire Canadian citizens without creating a Canadian legal entity may be in violation of tax and payroll rules.
- Options for hiring Canadian citizens to work remotely include nonresident employer registration, and engaging the services of either independent contractors or professional employer organizations.
One question that employers outside of Canada frequently ask is, “How do I hire a Canadian citizen to work remotely?”
A foreign entity that wants to directly hire an employee in Canada without creating a Canadian legal entity cannot simply hire an employee in Canada and place that individual on its normal payroll. By proceeding that way, the foreign entity would likely be in violation of Canadian tax and payroll rules (including not making the required deductions and remittances under Canadian laws). This could lead to penalties and fines for the employer as well as the employee.
Instead, there are a few options foreign employers may utilize, each with its own pros and cons, as well as potential pitfalls.
So what are the options? Three possibilities for employers follow below.
Nonresident Employer Registration
A foreign entity may be eligible to register as a nonresident business in Canada. The Canada Revenue Agency (CRA) allows foreign entities to register directly with it in order to obtain a business number and payroll number, which are required for hiring employees. Upon obtaining these numbers, the foreign entity can legally process an individual’s pay in Canada by making the requisite remittances to the CRA and any other governmental authority.
Typically, foreign entities that opt for this route will engage a third-party payroll agent to handle their Canadian payroll.
Under this option, the foreign entity will be able to hire Canadians directly (there is no maximum number of employees) and process Canadian payroll, without needing to form a separate Canadian legal entity.
This option can create corporate tax issues, notably if the type of work being performed in Canada creates a presumed establishment for tax purposes. For example, any type of sales position wherein the employee has the general authority to contract on behalf of the foreign entity may lead to presumed establishment issues in Canada, exposing the business to needing to file corporate income tax returns in Canada annually. It could also require the company to register for Canadian goods and service tax (GST), harmonized sales tax (HST), and provincial sales tax (PST) tax numbers.
With that said, this option is great for companies looking to hire individuals who will “sit” in Canada but support the foreign jurisdiction. For example, software engineers, developers, or other IT professionals are less likely to create any presumed establishment issues.
In some circumstances, a foreign entity can hire a Canadian as an independent contractor. However, this means that the foreign entity will not be “hiring” an employee, but rather a service provider who will be charging taxes on the services. Misclassification is the main risk when engaging an independent contractor. If ever a tax authority deems that the individual is in fact an employee, both the foreign entity and the individual can be subject to steep fines and penalties. Additional risks may arise under employment standards statutes and other employment-related laws.
Professional Employer Organizations
The last option for foreign entities is to engage the services of a professional employer organization (PEO). In those situations, the PEO becomes the employer of record of the employee in Canada. The PEO will hire the individual through the PEO’s Canadian entity and then assign the employee to the foreign entity to provide services.
While this option is great from an administrative perspective (i.e., quick to set up), it comes at a greater cost, typically ranging between 10–15 percent of the employee’s compensation. In addition, common employer risks may arise between the PEO and the foreign entity, meaning that hiring a PEO may not absolve the foreign employer from any employment-related liability under Canadian laws.
Hiring through a PEO also limits a foreign entity’s ability to issue certain types of incentives or restricted stock units (RSUs). Because the foreign entity is not the direct employer, it is not always possible to issue RSUs to nonemployees. Moreover, there are also concerns related to assigning intellectual property from the employee to the foreign entity because the employee’s employment agreement is with the PEO, not the foreign entity.
To conclude, Canada’s statutes and regulations provide foreign employers with multiple avenues to hire remote workers without necessarily needing to create a Canadian affiliate or entity. Each option comes with its pros and cons, so non-Canadian employers will likely want to assess the options carefully in order to make sure they have considered all the multiple issues.
Ogletree Deakins will continue to monitor developments and will publish updates on the Cross-Border blog as additional information becomes available.