Setting Up a Canadian Payroll for an Overseas Country

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With the world starting to recover from COVID-19 and take tentative steps towards reopening, it’s time to think about your company’s possible overseas expansion. One important market to consider is Canada. 

Canada is one of the world’s premier economies, offering a first-world business experience as far as trade restrictions, legal rights, and government support. The tax laws are relatively favorable from the corporate perspective and the generally low cost of living in Canada makes it a financially attractive option. 

When it comes to ease of doing business, Canada ranks an impressive 23rd in the world (out of 190 countries), meaning that business owners found Canada’s regulatory laws were favorable to business success compared to other countries. The World Bank ranks Canada as a high-income country and one of the best places to start a business. 

Planning the Expansion to Canada

Planning any overseas expansion starts with a clear assessment of the best path to hiring employees. Is it better to dive in with full force and open an entity from the very beginning, or is it wiser to start slow, hire through an Employer of Record (EoR), grow slowly and then switch to an entity when the project seems fully stable? 

The answer will be different for every company. In general, opening an entity is the most stable option. Countries give the most rights to companies that incorporate in its territory instead of choosing a work-around solution. But it’s also the riskiest. When your company opens an entity and hires through it, it assumes all the legal liability for the employment. An entity can also be challenging to close, requiring more time and more financial resources to cancel the entity if the project proves unsuccessful. 

An EoR, on the other hand, is usually a temporary solution for a company that wants to test a market or build slowly. The risk is much lower because the EoR, as the legal employer, assumes legal liability for the employees. But because it takes so little time to start operating in Canada with a EoR, it offers the most flexibility, allowing companies to grab short term opportunities they would miss if they had to wait for the government to process the entity.

Expansion strategies vary widely from company to company. Some prefer to send a single sales representative first to assess the market and to minimize any potential losses if it finds a poor product/market fit. Others send full teams.  

Any long-term presence in Canada involving a team of 10 or more employees will ultimately end up opening an entity. The biggest question is whether to open it at the start or let it grow organically until it becomes the obvious option. 

Payroll Data You Need to Know

Any expansion to a foreign country requires taking time to learn about the different compliance requirements in those countries. 

A local payroll accountancy firm or EOR will work with you if you’re ready to take the plunge into expanding to Canada. As a starting point for research though, online resources such as this Canadian payroll guide can provide you with basic information about Canada’s employment and payroll laws and regulations. 

Canada is divided into different provinces, all with slight variation in their labor laws and tax codes. That might not play an important role in expansion decisions, but it is important to have good reference materials available. 

Taxes: It’s particularly important to stay on top of changes in tax laws if you plan to hire through an entity. You will retain liability for any mistakes made. Keeping track can sometimes be confusing. For example, employer tax rates are relatively low in Ontario (7.66%) but depending on various circumstances, can be almost twice as high in Quebec (as much as 13.60%). 

Employees, however, pay a significant amount of tax in both regions. In Ontario, employees pay a federal tax starting at 15% and going as high as 33% for really high earners in addition to a local Ontario tax starting at 5.05% and rising to as much as 13.16%. 

In Quebec, employees pay the same rate of federal taxes, but local Quebec tax starts at an additional 15% and goes as high as 25.75% for the highest range of salaries. 

Minimum wage: It’s important to do some homework ahead of time. Otherwise, you might be surprised to learn that minimum wage is different from place to place.  In Ontario, for example, 14.25 CAD per hour. In Quebec, it’s only 13.10 CAD per hour. 

Working hours:  The typical work week is also slightly different in various parts of Canada. While most regions and industries adhere to a standard 40-hour week, and with overtime rates of 150% the regular salary beginning at 44 hours, Quebec has different norms for different sectors. The clothing industry works only 39 hours; forestry works 47 hours; and security work goes for 44 hours a week. 

Paid Time Off: In Ontario, employees who have been at the job for less than 5 years receive 2 weeks of PTO. After 5 years, the PTO goes up to 3 weeks. In Quebec, those who have been on the job for less than a year earn a day of PTO for every month they work and receive an additional 4% of salary as an indemnity. After a year, it goes up to 2 weeks and 4% indemnity. After 3 years, it goes up to 3 weeks and 6% indemnity. 

Termination: In most areas of Canada, termination must be in writing, with a notice period related to the length of service. Typically, it is one week for employees who worked for less than a year; 2 weeks for those who worked for up to 3 years, 3 weeks for those with five years of service. In Quebec, those with 1-5 years of service get 2 weeks’ notice, and 5-10 years get 4 weeks’ notice. 

Stay on Top of Changes

The world is changing before our eyes and the world of work is changing even faster. An expansion today may not even involve opening a physical office. Remote work is growing in popularity in the wake of the pandemic and many businesses are considering their options about remote work. 

One thing, however, is certain. Compliance will always be a challenge unless you are prepared in advance.